Lone Star Industries just issued $800 of perpetual 12% debt and used the proceeds to repurchase...

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Lone Star Industries just issued $800 of perpetual 12% debt andused the proceeds to repurchase stock. The company expects togenerate $185 of earnings before interest and taxes in perpetuity.Lone Star distributes all of its earnings as dividends at the endof each year. The firm’s unlevered cost of capital is 18% and thecorporate tax rate is 40%.
A.What is the value of Lone Star as an unlevered firm?

            B.Usethe Adjusted Present Value Method to calculate the value of LoneStar with leverage.
C.What is the value of the firm’s equity?
D.What is the required return on the firm’s levered equity(r_S)?
            E.  Usethe Flow-to-Equity method to calculate the value of Lone Star’sequity.

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3.6 Ratings (433 Votes)

a Unlevered Cost of Capital 18 Tax Rate 40 and EBIT 185 NOPAT EBIT x 1Tax Rate 185 x 104 111 Value of Unlevered Firm 111018 616667 b Perpetual Debt See Answer

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Lone Star Industries just issued $800 of perpetual 12% debt andused the proceeds to repurchase stock. The company expects togenerate $185 of earnings before interest and taxes in perpetuity.Lone Star distributes all of its earnings as dividends at the endof each year. The firm’s unlevered cost of capital is 18% and thecorporate tax rate is 40%.A.What is the value of Lone Star as an unlevered firm? B.Usethe Adjusted Present Value Method to calculate the value of LoneStar with leverage.C.What is the value of the firm’s equity?D.What is the required return on the firm’s levered equity(rS)? E. Usethe Flow-to-Equity method to calculate the value of Lone Star’sequity.