Firm Valuation Through Excess Returns Approach The incorporation of XYZ Inc. was completed through the raising of funds. These funds include net proceeds from debt and from equity at P5,000,000 and P20,000,000 respectively. The after-tax costs of debt and of equity are 9% and 15% in order. If the actual return of XYZ is forecasted to be 17% annually over the firm’s 10-year life, compute the firm value.

Firm Valuation Through Excess Returns Approach The incorporation of XYZ Inc. was completed through the raising of funds. These funds include net proceeds from debt and from equity at P5,000,000 and P20,000,000 respectively. The after-tax costs of debt and of equity are 9% and 15% in order. If the actual return of XYZ is forecasted to be 17% annually over the firm’s 10-year life, compute the firm value.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 6P

See similar textbooks

Similar questions

An overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Pick the correct choice. A- Preferred stock B- Equity C- Debt Three Waters Company (TWC) can borrow funds at an interest rate of 12.50% for a period of five years. Its marginal federal-plus-state tax rate is 45%. TWC’s after-tax cost of debt is_________% (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? Pick the correct choice. 5.60% 5.04%…
For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Equity Preferred stock Debt Water and Power Company (WPC) can borrow funds at an interest rate of 7.30% for a period of four years. Its marginal federal-plus-state tax rate is 25%. WPC’s after-tax cost of debt is 5.48% (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,092.79 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WPC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 8.57% 7.14% 5.71% 8.21%
While conducting a valuation study of Cross Corp for the annual update for the Trustees of the ESOP plan that owns a portion of the firm, you determine that the Terminal Value of the firm, at the end of a four-year Planning Period, is $120,070 (all $s in 000s). The firm’s capital structure is 30% debt and 70% equity, the cost of debt is 4%, and the cost of equity is 12%. The firm has a 24% tax rate. If the Present Value of Planning Period Cash Flows is $72,100, the Enterprise Value for Cross is: a. $72,100 b. $148,407 c. $156,194 d. $192,170 e. None of the above
Company A unlevered value is $100 million. The tax rate is 30%. The debt cost ofcapital is 3% and the asset cost of capital is 6%.i. What is company A’s value if debt/assets is raised to 25% after aleveraged recapitalization. Assume debt is permanent.
Shoobee, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average of capital. The WACC it to be measured by using the following weights: 50% long term, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock issuance, or both). The firm tax is 25%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters. Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows: Year Dividend 2021 P4.00 2020 3.75…
A company has a five year weighted average after tax cash flow of $125,000. It has been determined the discount rate is 19%, short term expected growth is 11%, and long-term sustainable growth is 3%. The analyst has also determined excess cash of $25,000. What is the value of the company based on the capitalization of after tax cash flows? a. $625,000 b. $657,895 c. $781,250 d. $909,090
National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return.g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.h. Interest expense is deductible for income tax…
To assist with evaluating potential capital projects, Carrium Insights Inc. is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements, together with current information, the Finance Manager has compiled the following information as it pertains to the company’s capital structure: Debt: Bonds outstanding has a face value of $568,000,currently selling at 95% of par. These bonds have 20 years left to maturityandacoupon rate of 7.55%.(Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 21,000 shares of common stock outstanding with a market price of $63.00.The company just paida dividend of $6.00; for ease of computation, dividends are expected to grow by 5% annually. Preferred stock:The company intends to offer 15,000 shares of preferred stock to the public at a price of $25.00 per share. The intention is to pay an annual dividend of $3.00. Additional Information: ✓The Company’s…
National Co. make these assumptions for valuation purposes:a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.b. The income tax rate is 25%.c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return.g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.h. Interest expense is deductible for income tax purposes 1.…
MAGGIE LTD Q&S (Computing individual or component costs of capital) Compute the cost of capital foreach of the following sources of financing: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rateof 12 percent. Interest payments are $120 and are paid semiannually. The bond hasa current market value of $1,125 and will mature in 10 years. The firm's marginal tax rate is 34 percent. b. A new common stock issue by a firm that paid a $1.75 dividend last year. The firm's dividends are expected to continue to grow at 8 percent per year forever. The price ofthe firm's common stock is now $28.00. c. A preferred stock that sells for $150, pays a 10 percent annual dividend, and has a $125 par value. d. A bond whose yield to maturity (based on the bond's market price) is 13 percentwhere the firm's tax rate is 34 percent. Identify the features and working formula for this question as per below (add if there's more): - Par Value = Coupon rate = Interest payments =…
Assume that a firm starts out as an all equity firm with $1,000,000 of equity, $1,000,000 of assets, and a return on assets (ROA) of 10 percent. Also assume that management then makes the decision to issue $200,000 of debt, at a before-tax rate of 5 percent, and use the proceeds to buy back $200,000 of equity. Based on this information, and assuming that the firm's tax rate is 40 percent, determine what the return on equity (ROE) will be after the buy back. O 10.50% 14.25% O 11.75 % 13.00% O 15.50%
The following information refers to Questions No. 13 through 15: The financial manager of Apple Co. is evaluating Banana Co. as a possible acquisition. Banana Co. is expected to produce annual after-tax operating cash flows of PI,500,000. Apple Co. will assume P1,000,000 of Banana Co.'s long-term liabilities. Apple Co.'s weighted average cost of capital is 12% and Banana Co.'s weighted average cost of capital is 15%. The acquisition will be evaluated as a perpetuity. Apple Co.'s common stock is trading at P25 per share with 1,000,000 shares outstanding and a P/E ratio of 10. Banana Co.'s stock is trading at P15 per share with 600,000 shares outstanding and a P/E ratio of 15. Based on this information, the estimated market value of the target- company is nearest P 9,000,000. b. 13. a. P10,000,000. P11,000,000. P11,500,000. с. d.