Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. capital structure forest ltd is planning to repurc

Capital Structure Forest Ltd is planning to repurchase part of its common stock by issuing...

50.1K

Verified Solution

Question

Finance

Capital Structure Forest Ltd is planning to repurchase part of its common stock by issuing debt. As a result the firms debt-equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has $7,500,000 debt outstanding. The cost of this debt is 10 percent per year. Forest Ltd expects to have an EBIT of $5,750,000 per year in perpetuity. The corporate tax rate is 40 percent.

Required:

According to Modigliani and Millers theory of the valuation of the firm with corporate taxes:

(a) What is the market value of Forest Ltd before the repurchase announcement?

(b) What is the market value of Forest Ltd after the repurchase announcement? [Hint This is the toughest part of the problem. Dont feel bad if you get lost in here. Just do your best. Also, you do not need to work this part out to do the rest of the problem]

(c) What is the expected return on the firms equity before the announcement of the stock repurchase plan? [Hint calculate ROE first]

(d) What is the expected return on equity of an otherwise identical all-equity firm?

(e) What is the expected return on the firms equity after the announcement of the stock repurchase plan?

Answer & Explanation Solved by verified expert
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: Zin AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students

Q

Write the equation in logarithmic form 34 81

Basic Math
Q

NASA is conducting an experiment to find out the fraction of people who black out at...

Basic Math
Q

explain whether it is possible to determine the approximate concentration if a solution of that sample...

Chemistry
Q

The Kf for the formation of Co(NH3)62+ is 7.70 × 104. The Kf for the formation of Co(en)32+ is...

Chemistry
Q

Using behavioral VHDL, design a Mealy-type finite state machine that detects input test vector that contains...

Electrical Engineering
Q

DRAG DROP THE ANSWER 28 24 21 24 Vertical angles theorem 25 27 Angle addition...

Geometry
Q

5 Convert the given Celsius temperature to its equivalent temperature on the Fahrenheit scale Use...

Basic Math
Q

7 Xavier worked 10 hours on Monday and 15 hours on Wednesday His total pay...

Basic Math
Q

Accounting
Q

Use this information for Train Corporation to answer the question that follow. The following financial...

Accounting
Q

Determine the cost of merchandise sold for the transaction on October 8 using the perpetual...

Accounting
Q

In his advice to auditors, Warren Buffett asks whether the auditor would have received the...

Accounting