omega corp. currently has 200,000 shares of stock outstanding and no debt. Howev
ID: 2778637 • Letter: O
Question
omega corp. currently has 200,000 shares of stock outstanding and no debt. However they are planning on issuing debt in order to buy back stock. Their EBIT is a constant 500,000 regardless of how much debt they issue and they pay all net income out as dividends. Their tax rate is 40%. They have estimated the following costs of debt and cost of Equity for various levels of debt.
116. what will be their net income be if they issue 2,000,000 in debt
a. 170,000 b 198,000 c216,000 d 330,000
117. what will be their WACC be if they issue 1,500,000 in debt
a 8.23% b 8.30% c 8.36% D 8.42%
118. what wil their share price be if they issue 500,000in debt
a. 16.94 b 17.12 c. 17.45 d 17.72
119. What is the value of the firms equity if they issue 3,000,000 worth of debt
a. 500,000 b 1.500,000 c. 2,000,000 d, 2,500,00
debt RD RE NET INC EQUITY FIRM %DEBT WACC PRICE 0 6% 9.00% 300,000 3,333,333 3,333,333 0% 9.00% 16.67 500,000 6.30% 9.40% 2,990,426 3,490,426 14..32% xxxx 1,000,000 6.80% 10.00% 1,500,000 7.50% 11.00% 41.51% xxxx 18.07 2,000,000 8.50% 12.5% xxxx 3,584,000 8.37% 2,500,000 10.00% 14.5% 3,000,000 12.00% 17.00% 84,000 xxxx 85.86% 17.47Explanation / Answer
116. what will be their net income be if they issue 2,000,000 in debt
Net income = (EBIT - Interest)*(1-tax rate)
Net income = ( 500000 -8.5%*2000000)*(1-40%)
Net income = 198000
Answer
b 198,000
117. what will be their WACC be if they issue 1,500,000 in debt
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Debt* After Tax cost of Debt
WACC = (1-41.51%)*11% + 41.51%*7.50%*(1-40%)
WACC = 8.30%
Answer
b 8.30%
118. what wil their share price be if they issue 500,000in debt
share price = 3490426/200000
share price = 17.45
No of stock outstanding after issue of 500000debt = 200000- 500000/17.45 = 171346.71
share price = 2990426/171346.71
share price = 17.45
Answer
c. 17.45
119. What is the value of the firms equity if they issue 3,000,000 worth of debt
value of the firms equity = Net Income/RE
value of the firms equity = 84000/17%
value of the firms equity = 494117
Answer
a. 500,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.