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A5 1-5 Please show workings with solutions

Questions 1-5 relate to the same mega problem. For the questions that follow, assume that changes in working capital are negligible and capex and depreciation are of the same magnitude and therefore cancel each other.

Q1. Suppose Talmart is an all-equity firm with an EBIT of $75,000 per year that is expected to stay the same for the foreseeable future. Your research shows that the beta equity of Talmart is 2.00 and it has 20,000 shares outstanding. Suppose the expected return on the market is 10% and the risk free rate is 5%. Assume the corporate tax rate is 35%.

Q1. What is the market value and price per share of Talmart?

$260,000; $13

$390,000; $19.50

$325,000; $16.25

$162,500; $8.13

Q2. Talmart was an all-equity firm with an EBIT of $75,000 per year that is expected to stay the same for the foreseeable future. Your research had shown that the beta equity of Talmart was 2.00 and it had 20,000 shares outstanding. Talmart has however recently issued a bond yielding 7.50% with a market value of $250,000 and will use these funds to buy back shares (a fairly common practice). Talmart also plans to retain $250,000 of debt financing in perpetuity. Suppose the expected return on the market is 10% and the risk free rate is 5%. Assume the corporate tax rate is 35% but interest payments on debt are not tax deductible.

Q2. How many shares will Talmart buy back? (round to the nearest whole number)

Q3. What will Talmarts new return on equity be?

Q4. What will Talmarts new beta of equity be?

Q5. What will Talmarts new share price be? (round to the nearest whole dollar)

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