Assume the following data for TONINO Corp: Expected EBIT = $160 million (in perpetuity) Cost of unlevered equity...

90.2K

Verified Solution

Question

Finance

Assume the following data forTONINO Corp:
Expected EBIT = $160 million (in perpetuity)
Cost of unlevered equity = 8%
Market risk premium = 5%
Risk free rate = 4%
The corporate tax rate =25%
Currently TONINO is unlevered with twenty-millionshares outstanding. Before the market opens TONINO willannounce the change of capital structure from all equity finance toa debt-equity ratio of 0.5. Consol bonds (perpetuities) will beissued to repurchase shares of common stock 8 days after theannouncement. The investment grade of Bonds is AAA and areconsidered riskfree. Assume markets are efficient in thesemi-strong form.
Based on above informationcalculate:
The value of the firm unlevered
The share price of the firm unlevered
The cost of equity of the levered firm.
The weighted average cost of capital
The value of the firm levered using r_wacc
The share price of the firm immediately after announcing thechange of capital structure from unlevered to levered.
Value of debt to be issued (8 days after the announcement)
#shares to be repurchased with debt (8 days after theannouncement)
# shares outstanding after the repurchase
Value of equity (S^L)
Price of stock after the share repurchase with bonds (6 daysafter the announcement)
EPS^L
ROE^L
The value of the firm based on MM proposition I withcorporate tax
Which capital structure should the firm select when corporatetaxes are included (unlevered or levered)? Explain.

Answer & Explanation Solved by verified expert

3.8 Ratings (600 Votes)

a EBIT 16000000 less tax 25 4000000 Net income 12000000 Cost of unlevered equity 8 Value of unlevered firm in perpetuity Expected Net incomecost of unlevered equity 120000008 150000000 So value of unlevered firm is See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Assume the following data forTONINO Corp:Expected EBIT = $160 million (in perpetuity)Cost of unlevered equity = 8%Market risk premium = 5%Risk free rate = 4%The corporate tax rate =25%Currently TONINO is unlevered with twenty-millionshares outstanding. Before the market opens TONINO willannounce the change of capital structure from all equity finance toa debt-equity ratio of 0.5. Consol bonds (perpetuities) will beissued to repurchase shares of common stock 8 days after theannouncement. The investment grade of Bonds is AAA and areconsidered riskfree. Assume markets are efficient in thesemi-strong form.Based on above informationcalculate:The value of the firm unleveredThe share price of the firm unleveredThe cost of equity of the levered firm.The weighted average cost of capitalThe value of the firm levered using rwaccThe share price of the firm immediately after announcing thechange of capital structure from unlevered to levered.Value of debt to be issued (8 days after the announcement)#shares to be repurchased with debt (8 days after theannouncement)# shares outstanding after the repurchaseValue of equity (SL)Price of stock after the share repurchase with bonds (6 daysafter the announcement)EPSLROELThe value of the firm based on MM proposition I withcorporate taxWhich capital structure should the firm select when corporatetaxes are included (unlevered or levered)? Explain.