What is the value of the equivalent unlevered firm

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Reference no: EM131984444

Mike's Tree Services (hereafter MTS) has expected perpetual operating income (EBIT) of $1,000 per year. MTS currently has perpetual risk-free debt with a market value of $1,200. The beta of the firm’s assets is 1.0. There are 100 shares outstanding. The required return on the market is 12% and the risk-free rate is 6%. Assume that you are operating in the M & M framework with corporate taxes but no bankruptcy costs. The firm’s corporate tax rate is 40% For the following questions show formulas and steps

a) What is the value of the equivalent unlevered firm?

b) What is the value of MTS’s equity, with its current capital structure?

c) What is MTS’s current WACC?

d) MTS’s management is considering issuing $1,800 of additional debt and using the proceeds to buy-back some of its equity. What is the new total value of the firm be, if the firm undertakes the restructuring?

e) How many shares would MTS be able to buy back and at what price?

Reference no: EM131984444

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