Suppose there are perfect capital markets with taxes. Investors expect a company to have $120 earnings before interest a
Posted: Wed May 18, 2022 10:25 pm
Suppose there are perfect capital markets with taxes. Investors
expect a company to have $120 earnings before interest and taxes in
one year. This company has a 25% tax rate, $100 market value of
debt, and 20 shares outstanding. This company’s net working
capital, depreciation expense, and capital expenditures are all
expected to be zero in perpetuity. Investors expect this
company to have the same earnings before interest and taxes, market
value of debt, tax rate, and number of shares outstanding in
perpetuity. The firm’s unlevered cost of equity is 8% and its cost
of debt is 5%. Based on this information, what amount would you
expect this company’s share price to be closest to?
$5
$20
$40
$80
$100
$200
$400
expect a company to have $120 earnings before interest and taxes in
one year. This company has a 25% tax rate, $100 market value of
debt, and 20 shares outstanding. This company’s net working
capital, depreciation expense, and capital expenditures are all
expected to be zero in perpetuity. Investors expect this
company to have the same earnings before interest and taxes, market
value of debt, tax rate, and number of shares outstanding in
perpetuity. The firm’s unlevered cost of equity is 8% and its cost
of debt is 5%. Based on this information, what amount would you
expect this company’s share price to be closest to?
$5
$20
$40
$80
$100
$200
$400