Reference no: EM13704067
Your company's management team is considering three corporate strategies. The probability of success and total firm value next year in the event of success of the three strategies are shown below:
Strategies A B C
Probability of success 100% 70% 50%
Firm value if successful $70M $90M $115M
Assume that for each strategy, firm value is zero next year in the event of failure. Assume also that all risk is idiosyncratic and the risk-free rate is zero. There are no taxes, no bankruptcy costs, and no asymmetric information.
a) Which strategy results in the highest firm value today?
Your company currently has debt of $50M due next year. Suppose the management team will choose the strategy that leads to the highest equity value today.
b) Which strategy will management choose?
c) What is the equity value today? What is the total firm value today?
d) Suppose the company issues equity and buys back its debt, reducing the debt due next year to $10M.
i. What strategy will management choose after the transaction?
ii. What will be the total value of the firm after the transaction?
e) Suppose you own 1% of the company's debt. You are deciding whether to sell your debt back to the firm. If you expect the firm to reduce its debt to $10M, what price would you demand to sell your debt?
f) Based on your answer to (e), how much will the company need to raise from equity holders in order to buy back the debt?
g) How much will equity holders gain or lose by recapitalizing to reduce leverage? How much will debt holders gain or lose?
h) Based on your answer to (g), would you expect your company to choose to reduce its leverage?
$115M
|
A cylindrical specimen of a metal alloy
: A cylindrical specimen of a metal alloy 51.3 mm long and 11.1 mm in diameter is stressed in tension. A true stress of 350 MPa causes the specimen to plastically elongate to a length of 57.9 mm. If it is known that the strain-hardening exponent for th..
|
|
Waysafe inc. consists of two grocery stores
: Waysafe Inc. consists of two grocery stores. One store is fairly valued at $30M and the other store, valued at $10M, could be torn down and then the land could be sold for $25M. Waysafe is unwilling to tear down this store and sell the land, h..
|
|
Determine the thermal efficiency
: A system undergoing a power cycle requires an energy input by heat transfer of 104 Btu for each kW-h of net work developed. Determine the thermal efficiency.
|
|
Determine the change in pressure required to reduce
: If the bulk modulus for water at 70 degrees Fahrenheit is 319 kips per square inch, determine the change in pressure required to reduce its volume by 0.3%
|
|
Which strategy results in the highest firm value today
: a) Which strategy results in the highest firm value today?Your company currently has debt of $50M due next year. Suppose the management team will choose the strategy that leads to the highest equity value today.
|
|
In a thin-walled cylinder loaded with internal pressure
: In a thin-walled cylinder loaded with internal pressure, show how a single-element strain gage in hoop direction can be used to established the hoop and axial stresses.
|
|
Calculate number of vacancies per cubic meter in some metal
: Calculate the number of vacancies per cubic meter in some metal at 753°C. The energy for vacancy formation is 0.81 eV/atom, while the density and atomic weight for this metal are 6.38 g/cm3 and 49.43 g/mol, respectively. Find in m^-3 units.
|
|
Appropriate to use the current wacc
: When a firm is evaluating the purchase of a business that is unrelated to its current business, it is appropriate to use the current WACC of the firm that is purchasing the business?
|
|
Calculate fraction of atom sites that are vacant for copper
: Calculate the fraction of atom sites that are vacant for copper (Cu) at a temperature of 729°C (1002 K). Assume energy for vacancy formation of 0.90 eV/atom. Repeat this calculation at room temperature (298 K).
|