Risk-free interest rate-corporate tax rate, Finance Basics

XYZ is considering a capital restructuring to allow $300 million in debt. Currently, XYZ is an all-equity firm with earnings before interest and taxes of $260 million. Assume unlevered firms in the same industry have betas of 0.80. Assume the market risk premium is 6% and the risk-free interest rate is 5%. Assume that the corporate tax rate is 38%. You may assume that all earnings are paid out as dividends, and that the debt is used to buy back stock. For simplicity, assume that cash flows are perpetual as are payments on the debt.

a. How would the proposed restructuring change the value of XYZ as a whole? (Hint: You may not need to compute the new cost of capital to find the new firm value.)

b. If XYZ was considering issuing $2 billion in debt instead of $300 million, would the methodology you used in the previous question be equally appropriate? Why or why not?

 

Posted Date: 3/13/2013 6:26:57 AM | Location : United States







Related Discussions:- Risk-free interest rate-corporate tax rate, Assignment Help, Ask Question on Risk-free interest rate-corporate tax rate, Get Answer, Expert's Help, Risk-free interest rate-corporate tax rate Discussions

Write discussion on Risk-free interest rate-corporate tax rate
Your posts are moderated
Related Questions
Solutions to the conflict - Relationship between Auditors and Shareholders 1. Firing The auditors may be detached from office at the AGM via the shareholders. 2. Lega

Why should Roche care about the spreads on debt instruments

Definition of Stock Exchange According to Pyle: "Stock Exchange are market places where securities which have been listed thereon, may be bought and sold for either investme

Shareholders and Management There is near separation of ownership and management of the firm. Landlord employs professionals as managers who such have technical skills. Manage

Example of Accounting Rate of Return Method                                    Shs. Project X cost              500,000 Scrap value                 100,000 Stream of


Agency Theory An agency relationship arises whether one or more parties identified the principal contracts or hires another identified an agent to perform on his behalf some

Ask questioAustralian’s Speleological App Projectn #Minimum 100 words accepted#

Question 1: i) Discuss  the main risks facing a retail bank in its traditional business of deposit taking and lending? ii) How can a bank manage the risks related to credit

After carefully reading all the available information, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.