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Caviar Fishfarm Ltd (‘CFL’) is unlevered, has an equity beta of 1.25 and unlevered cash flows...

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Finance

Caviar Fishfarm Ltd (‘CFL’) is unlevered, has an equity beta of1.25 and unlevered cash flows of $76,800 per annum that willcontinue in perpetuity. The expected market return is 10%p.a andTreasury bills earn 2%p.a. CFL is currently considering issuing$300,000 in new debt with an 8% interest rate. CFL would repurchase$300,000 of its own shares, using the proceeds of the debt issue.There are currently 32,000 shares outstanding and the company’seffective marginal tax rate is 34%. Assuming it is certain that thecompany completes the restructure, calculate the value of eachshare in the company, after the restructure (ignore otherinformation effects). (in dollars to nearest cent)

Answer & Explanation Solved by verified expert
4.4 Ratings (655 Votes)
Step 1 Calculating the value of unlevered firm Since firm is unlevered hence equity beta unlevered beta 125 Risk free rate T bill interest rate 2 pa Market return 10 According to CAPM Unlevered cost of equity Risk free rate unlevered beta market return risk free rate 2 125 10 2 2 125 x 8 2    See Answer
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