Calculate the value of the company with borrowing, Finance Basics

Assignment Help:

Suppose the ABC Corporation is currently all-equity financed and would like to increase its value by issuing debt.

The firm has annual earnings before interest and taxes of $7,000,000. Their proposal is to borrow $4,500,000 in the form of perpetual debt. The company's management decides that the cost of equity for the company is 12%.

ABC is planning to buy back its stock with the entire amount borrowed. The company's tax bracket is 35%.

a. Compute the company's value if they borrow.

b. You know the company's financial data and conclude that they made a mistake when computing the cost of equity. You estimate the correct beta for the unlevered firm to be 1.3. Assume the risk-free interest rate is 7% and the market risk premium is 5%, Re-calculate the value of the company with borrowing.

 


Related Discussions:- Calculate the value of the company with borrowing

Management of company and directors, Management of company and Directors ...

Management of company and Directors They will consequently be interest in as: a) In generating profits efficiency of the company b) The company's capability to generate

Depreciation, Which depreciation method would produce the higher NPV and ho...

Which depreciation method would produce the higher NPV and how much higher would it be?

#bond computations, bond issued $900,000 of 8% on 3/1, they pay interest on...

bond issued $900,000 of 8% on 3/1, they pay interest on 9/1 and mature in 10years case a @ 100, case b @ 92, case c @ 105 wha is total cash outflow thru maturity total borrowing co

Fiscal federalism, What are the principles of multiunit finance?

What are the principles of multiunit finance?

Hull-white model, Hull-White model As an extension of the Vasicek model...

Hull-White model As an extension of the Vasicek model, Hull-White model (1990) assumed that the short interest rate process follows the mean-reverting stochastic differential e

Limitations of middle asia stock exchange index, Limitations of Middle Asia...

Limitations of Middle Asia Stock Exchange Index 1. The twenty (20) company's sample whose share prices are utilized to calculate the index are not true representatives. 2.

What is meant by underwriting, Question 1: (a) What is meant by underwr...

Question 1: (a) What is meant by underwriting? (b) How can underwriting be used to manage the risks of a life insurance company? (c) Give and describe the three types of

Intro to finance, discuss the flow of fund in an open economy

discuss the flow of fund in an open economy

Calculate the lump sum, Your daughter is a beginning freshman in high schoo...

Your daughter is a beginning freshman in high school. By the time she enters her freshman year in college, you would like to have savings accumulated to pay her tuition for her nex

Equities and sophisticated investors, Assignment Gary and Beth have acc...

Assignment Gary and Beth have accepted the asset allocation that you have given them, but are now looking to you to give them some advice on what stocks they should purchase. R

Write Your Message!

Captcha
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