of Quiz 3-Chapter 16, 17 & 19 (25 points total) 1. AZ Co. is an all borrowing of
ID: 2786824 • Letter: O
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of Quiz 3-Chapter 16, 17 & 19 (25 points total) 1. AZ Co. is an all borrowing of this firm if you ignore taxes? $4 million at 10% interest to repurchase 10,000 shares of the outstanding stock. What is the value an all equity firm, that has 100,000 shares of stock outstanding. The company es in the process of 2. AZ Co. is borrowing $4 millon you ignore taxes? at 10% interest to replace 25% of its outstanding shares what is the value of this firm if For Questions 3-5 AZ Co. is an all equity firm that has 100,000 shares of stock outstanding, with a market price of $30 per share. The company is considering adding S4 million of debt with a coupon rate of 100% to the apital structure. AZ pays 34% tax rate. 3. What is the present value of the tax shield on debt (Te 8)? 4. What is the value of the leveled firm if you ignore taxes? 5. What is the value of the equity in the levered firm? 6, AZ firm has a debt-equity ratio of 0.75. If the company's pre-tax cost of debt is 8% and the otherwise unlevered cost of equity is 12%, what is the company's levered cost of equity if we ignore taxes? For Questions 7-8 AZ firm, has a debt-equity ratio of 0.75. If the company's pre-tax cost of debt is 8% and the cost of equity is 12%. 7. What is the company's unlevered cost of equity if we ignore taxes? 8. What will the company's cost of equity be if it changes the debt-equity ratio to 1?Explanation / Answer
Total number of equity shares outstanding = 100,000 (A)
Number of equity shares to be repurchased = 10,000(B)
Remaining Equity shares = (A) - (B) = 100,000 - 10,000 = 90,000 shares (C)
Total Borrowing = $ 4,000,000 (D)
Rate of Interest = 10%
As no information is provided about the market price of equity share, we can assume as the company is borrowing as such amount so that it can pay the amount on 10,000 equity shares.
So, Market price of a equity share = (D) = $ 4,000,000 = $ 400 (E)
(B) 10,000
So, the Market value of the remaining shares = (C) * (E) = 90,000*$ 400 = $ 36,000,000 (F)
Interest on Borrowings = 10% * (D) = 10% * $ 4,000,000 = $ 400,000 (G)
Total Value of the firm = Total Borrowings + Total Equity
= (D) + (F) - (G)
[We have subtracted (G) i.e Interest on Borrowings as it is an expense and should be deducted from the profits of the firm. The equity is the amount of the shareholders which include all the profits and losses of the organisation as this is the amount which is invested in the firm. So, Interest on borrowings should be deducted from the equity to ascertain the net position of the firm.]
Therefore, the value of the firm = $ 4,000,000 + $ 36,000,000 - $ 400,000
= $ 39,600,000
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