Price be immediately after the firm announces

Assignment Help Finance Basics
Reference no: EM13671409

1. A firm has a senior bond obligation of $20 due this period and $100 due next period. It also has a subordinated loan of $40 owed to Jack and Jill and due next period. It has no projects that provide cash flows this period. Therefore, if the firm cannot get a new loan for $20, it must liquidate. The firm has a current liquidation value of $120. If the firm does not liquidate, it can take on one of two projects with no additional investment funding needed. If it takes project A, the project will generate a cash flow of $135 next year for sure. If it takes project B, the project will generate a cash flow next year of $161 or $69 with equal probability. Assume risk-neutrality, a zero interest rate, no direct bankruptcy costs, and no taxes.

(a) If the firm were entirely equity financed, would it decide to liquidate, adopt project A, or adopt project B?

(b) The firm has approached Jack and Jill and asked them for a $20 (subordinated) loan. The $20 loan proceeds will be used to pay off the $20 of senior debt that is currently due. The firm promises to pay Jack and Jill back $20.5 next period on this new loan plus the $40 on the original loan. If Jack and Jill agree to the loan, which project will be taken by the firm? Should Jack and Jill agree to the loan? Justify your answer with the relevant calculations.

2. A firm currently has equity with a market value of $600,000,000 and debt with a market value of $500,000,000. The firm has 10,000,000 shares outstanding. The bonds offer investors a return of 8%. The firm is contemplating issuing $300,000,000 in new equity and using the proceeds to repurchase $300,000,000 of the firm's debt. The corporate tax rate is 35%, the effective personal tax rate on equity income is 10% and the effective personal tax rate on interest income is 20%.
(a) What will the firm's stock price be immediately after the firm announces its refinancing plan?
(b) How many shares will the firm issue?
(c) What is the market value of the firm's (i) debt and (ii) equity immediately before the refinancing plan is announced?
(d) Calculate the market value of the firm's (i) debt and (ii) equity immediately after the refinancing plan is announced (but before it is actually executed).
(e) Calculate the market value of the firm's (i) debt and (ii) equity after the equity issue and bond repurchase are completed.

Reference no: EM13671409

Questions Cloud

The distribution environmen : Discuss the major considerations about the distribution environment that must be understood before deciding upon the structural design of the package.
Network design and installation for devry : Network Design and Installation for DeVry Computer Lab
Design a chip that could control a bicycle taillight : The goal of year's baseline project is to design a chip that could control a bicycle taillight to produce an apparently random flash sequence.
What will be the percentage change in eps : A firm expects to have a 15 percent increase in sales over the coming year. If it has operating leverage equal to 1.25 and financial leverage equal to 3.50, then what will be the percentage change in EPS?
Price be immediately after the firm announces : What will the firm's stock price be immediately after the firm announces its refinancing plan?
Analyzing the statement of cash flow : How would a manager determine if he/she should purchase a large piece of equipment by analyzing the statement of cash flow?
Netflix plan to achieve its long-run objective : 1. What is Netflix's long-run objective? How does Netflix plan to achieve its long-run objective? How would you assess Netflix's performance to date?
The current shape of the u.s. treasury yield curve : 1.Based on the current shape of the U.S. Treasury yield curve, do you think that now is a good time for a financially stable company to issue bonds? Why or why not?
What would the after-tax cash flow in year three : What would the after-tax cash flow in year three

Reviews

Write a Review

Finance Basics Questions & Answers

  Compute the discount rate

Compute the discount rate. (Do not round intermediate calculations. Input your answer as a percent rounded up to the nearest whole percent.)

  Return on equity firm a and firm b have debt-total asset

return on equity firm a and firm b have debt-total asset ratios of 55 and 45 and returns on total assets of 20 and 28

  Rent and other fixed expenses are 1750 per month assume

martha has asked you to evaluate her business marthas tattoo salon. martha has five tattoo artists working for her.

  What is the current bond price

Ninja Co. issued 13-year bonds a year ago at a coupon rate of 7.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 6.2 percent, what is the current bond price?

  Significance of low value of r-square in regression

Capital Asset Pricing Model (CAPM) is used to calculate the required return from a stock. To calculate the required return from ABC stock, a regression was run between the S&P Index daily retun over risk free rate.

  Assume that you have 165000 invested in a stock whose beta

assume that you have 165000 invested in a stock whose beta is 1.25 85000 invested in a stock whose beta is 2.35 and

  Calculate the firms operating cycle calculate the firms

cash conversion cycle american products is concerned about managing cash efficiently. on the average inventories have

  Suppose an investment offers to quadruple your money in 12

suppose an investment offers to quadruple your money in 12 months dont believe it. what rate of return per quarter are

  What will be its dividend payout ratio

If net income next year is $1.8 million and Perkin follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places.

  How much does dynamo currently pay in interest

How much does Dynamo currently pay in interest, and how much will it have to pay after the restructuring in the prior problem, assuming that the cost of debt is constant?

  Calculate u d, and p for a two-step tree

Consider a European call option on a non-dividend-paying stock where the stock price is $40, the strike price is $40, the risk-free rate is 4% per annum, the volatility is 30% per annum, and the time to maturity is six months.

  Explain what is the projects cost of equity

Explain how much importance should be given to the energy cost situation and what is the project's cost of equity

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