Calculate the value of the company with borrowing, Finance Basics

Suppose the ABC Corporation is currently all-equity financed and would like to increase its value by issuing debt.

The firm has annual earnings before interest and taxes of $7,000,000. Their proposal is to borrow $4,500,000 in the form of perpetual debt. The company's management decides that the cost of equity for the company is 12%.

ABC is planning to buy back its stock with the entire amount borrowed. The company's tax bracket is 35%.

a. Compute the company's value if they borrow.

b. You know the company's financial data and conclude that they made a mistake when computing the cost of equity. You estimate the correct beta for the unlevered firm to be 1.3. Assume the risk-free interest rate is 7% and the market risk premium is 5%, Re-calculate the value of the company with borrowing.

 

Posted Date: 3/13/2013 6:19:29 AM | Location : United States







Related Discussions:- Calculate the value of the company with borrowing, Assignment Help, Ask Question on Calculate the value of the company with borrowing, Get Answer, Expert's Help, Calculate the value of the company with borrowing Discussions

Write discussion on Calculate the value of the company with borrowing
Your posts are moderated
Related Questions
• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are cur

Tax Differential Theory Advanced via Lichtenberger and Ramaswamy in 1979.They argued that tax rate on dividends is higher quite than tax rate on capital gains. Thus, a firm th

Ask question #Minimum what are the challenges that a finance manager may face?



Example of Sales Method The balance sheet of XYZ Ltd as on date 31st December 2002 is as following:          Net fixed asset Current assets   F

Buying Shares of a Company Factors should be refer when Buying Shares of a Company 1. Economic situation of the country and other non-economic factors as like unfavorable c

Example of Theoretical Value As a result of the purchase of an asset, the income stream will rise by of £1,000 per annum for 25 years.  By assuming a discount rate of 20 perce

Conditions for Lease Finance Lease finance is ideal within the following circumstances: a) Whenever the asset depreciates faster. b) Whenever the asset is matter to obso

What are the Methods of Underwriting An underwriting agreement may take any of the below three forms: (i) Standing behind the issue: Under this method, underwriter guarant