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Calculate the value of the company

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Reference no: EM133012041

Question - Consider the case of the company "Vida Feliz", which is currently fully financed with equity (all equity capital structure), is expected to generate a perpetual operating income (operating income) of $ 6,500 and has a cost of capital ( WACC) of 12%. Management is considering the possibility of issuing Bonds for a par value of $ 16,000 with a yield to maturity of 6% for the purpose of repurchasing shares worth $ 16,000 (The company is planning to issue $ 16,000 in debt at a cost of 5% in order to buy back $ 16,000 worth of its equity).

a. Calculate the value of the company (Vu) before announcing the issuance of the bonds considering that there are no taxes.

b. Calculate the value of the company (BV), the Debt value (D) and the Equity Value (E), after the announcement of the bond issue, considering that there are no taxes.

c. Calculate the cost of equity (re) and cost of capital (rwacc) under the new capital structure, assuming there are no taxes.

d. Calculate the value of the company (Vu) before announcing the issuance of the bonds considering an income tax rate of 25%.

e. Calculate the value of the company (BV), the Debt value (D) and the Equity Value (E), after the announcement of the bond issue, considering a tax rate on profits of 25%.

f. Calculate the cost of equity (re) and cost of capital (rwacc) under the new capital structure, assuming that taxes are 25%.

g. Calculate the equity value (E) using the leveraged cash flow and the equity cost (re) considering that the taxes are 25%.

h. Calculate the value of the company (BV) using the pure flow and the cost of capital (rwacc), considering that the taxes are 25%.

Reference no: EM133012041

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