What is the value of def company

Assignment Help Finance Basics
Reference no: EM13260033

ABC Company and DEF Company are competitors, and being in the same industry they have tried to be very similar to each other with one significant difference. The CEO of ABC hates debt and the CEO of DEF thinks that debt is good for the income statement and improves DEF's return on equity. Here are the salient facts to consider:
• ABC Company has 10,000 shares of common stock outstanding, and each share is worth $20.
• The capital structure of DEF Company is $50,000 in debt with interest payments at 12% annually.
• The total capitalization of ABC and DEF are the same.
• Both firms think they will have earnings of $55,000 a year continuously and because of their costs, neither firm pays any taxes. For the purposes of this problem, investors can also borrow money at 12% annually.

a) What is the value of ABC Company?

b) What is the value of DEF Company?

c) What is the market value of DEF Company's equity?

d) Why is ABC's equity more or less risky than DEF's equity?

Reference no: EM13260033

Questions Cloud

What is the irr for the gold mine : the cash inflows are projected to grow at 2 percent per year for the next 10 years. After 11 years, the mine will be abandoned. Abandonment costs will be $119,000 at the end of year 11.
Embassy motorcycle manufactured-optimal solution : Embassy Motorcycle (EM) manufactured two lightweight motorcycles designed for easy handling and safety. The EZ-Rider model has a new engine and a low profile that make it easy to balance. The Lady-Sport model is slightly larger, use a more traditiona..
What is the intrinsic value of the stock today : what is the intrinsic value of the stock today? Given the current stock price today (P0 = $16), should you buy the stock and briefly explain why or why not?
Determine the given function : Another approach to the Lorentz Transformations. Relativists often use a quantity calledrapidity to describe the frame transformations. determine the function f(R)
What is the value of def company : Both firms think they will have earnings of $55,000 a year continuously and because of their costs, neither firm pays any taxes. For the purposes of this problem, investors can also borrow money at 12% annually.
Have you ever encountered the situation where you : Have you ever encountered the situation where you or someone you knew had what seemed like a very good idea but when the idea was discused with the immediate boss ad when they turn presented the concept to top managment?
Describe the its motion : A permanent magnet is hung from a string ( balanced ) and pointed in an East - West orientation and released. Describe its motion
Explain what are the partial pressure and mole fraction : If the test of such a breath sample yields a reading of 0.08%, what are the partial pressure and mole fraction of CH3CH2OH in the breath of the person who was tested? Assume the atmospheric pressure and temperature are 101 kPa and 21.0 oC.
What is the cars speed just after gravel is loaded : a 1.00 x 10^4 kg railroad car is rolling at 6 meters per sec. What is the cars speed just after gravel is loaded

Reviews

Write a Review

Finance Basics Questions & Answers

  Determine the current stock price

Suppose that a fifteen year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a nominal annual rate of return of 12%, with quarterly compounding,

  The costs of maintaining current assets

The costs of maintaining current assets, including the opportunity cost of capital is known as, Expenses should be recorded in the period in which they are used up.

  Advantages and disadvantage of risk in investment

The concept of risk is based on uncertainty about future outcomes. Write down the advantages and disadvantage of risk in investment.

  What is the real risk-free rate of return

On the basis of these data, what is the real risk-free rate of return?

  Computation of earnings before interest and taxes

Computation of earnings before interest and taxes based on sensitivity analysis and the fixed and variable cost estimates are considered accurate within a plus or minus 6% range

  Determine the value of portfolio today

Suppose you invested $10,000 eight years ago. The arithmetic average is 10.9 percent and the geometric average return is 10.5%. What is the value of your portfolio today

  Total cost recovery for 2012

Determine her total cost recovery for 2012 with respect to the seven-year class assets and the amount of any § 179 carryforward.

  Useful models for valuing derivatives

The derivatives market is complex because derivative buying and selling includes many things like financial contracts.

  What is the dollar amount of each semiannual coupon payment

A bond has a par value of $1000 and currently sells for $987. The bond's coupon rate is 7.9% and coupon payments are made semiannually. What is the dollar amount of each semiannual coupon payment? Round to the nearest dollar.

  Investment expected return

Given investment A and investment B with the following risk return characteristics, determine which of the following is a correct statement that is the best reason to prefer that investment.

  Compute the break-even point in units

Shock Electronics sells portable heaters for $25 each unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed expenses are $96,000.

  Question on value of share

The Rufus Corporarion has 125 million shares outstanding and analyst expect Rufus to have earnings of $500 million this year. What is the value of a share of Rufus stock?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd