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PLEASE ANSWER A) AND B) The JJ. Binks Company is an all equity firm. It...

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Finance

PLEASE ANSWER A) AND B)

The JJ. Binks Company is an all equity firm. It expects perpetual earnings before interest and taxes (EBIT) of $120 million per year. Its equity required return is 15%. The firm is subject to a 25% tax rate.

a. Calculate the value of the un-levered JJ. Binks?

b. The company considers leveraging as a way to increase the firm value. With leveraging it will face bankruptcy possibility at a cost of $60 million in exactly one year (Assume a 15% discount rate). The company plans to issue debt and buy back shares with the proceeds. It considers the following debt issuance: $50m, $75m , $100m, 125m, 150m and 175m. These debt levels will introduce an increasing probability financial distress of 5%, 10%, 20%, 30%, 50% and 70%, respectively. Evaluate the JJ. Binks optimal capital structure.

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