Eversharp is an all-equity firm where annual sales are expected to be $100 milli
ID: 2800729 • Letter: E
Question
Eversharp is an all-equity firm where annual sales are expected to be $100 million in perpetuity. The firm estimates its cost of production will be 65% of sales. The stock’s beta is currently 1.30 and faces a 30% tax rate. Further, there are 5 million shares outstanding. The current yield-to-maturity on T-Bills is 2.7%, and the market risk premium is 7%. The firm is considering buying back $50 million of equity by issuing debt. The firm can issue debt at 8%. Post recapitalization, what is the value of:
1. The firm
2. The firm’s equity? **** SHOW ALL WORKING AND STEPS*****
Explanation / Answer
Computation of Weight Average Cost of Capital(WACC)
Weight Average Cost of Capita =8.70%
Ke(Cost of Equity) =RF+Beta(Risk Premium)(Rm-Rf)
=2.70+1.30(7)
=11.80%
Kd(Cost of Debt) = Interest (1-Tax Rate)
=8%(1-0.30)
=5.60%
Step - 2
Computation of Profit after tax or FCFF
Value of Firm = FCFF/ko-g
=24.50/0.0870
=281.61 Million $
Value of Equity = Value of Firm - Debt
=281.60-50
=231.60 Million $
Particulars Proportion % WACC Equity 0.50 11.80 5.90 Debt 0.50 5.60 2.80 WACC 8.70%Related Questions
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