e. The Value of the Levered Firm (post-recapitalization): f. The Value of the Equity of the Firm (post-recapitalization)

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E The Value Of The Levered Firm Post Recapitalization F The Value Of The Equity Of The Firm Post Recapitalization 1 (126.81 KiB) Viewed 38 times

e. The Value of the Levered Firm (post-recapitalization): f. The Value of the Equity of the Firm (post-recapitalization): g. The required return on the equity of the levered firm: h. Demonstrate the impact of the recapitalization on the wealth of the of MMS: shareholders

5. (15 points) An all-equity financed Irish whiskey distiller, MaryMargaret Spirits, Inc.., MMS, has 50 million shares of common stock outstanding, which is trading on the NASDAQ for $30 per share. The stock's beta is 0.8. The market risk premium is 8% and the risk-free interest rate is 2%. Assume we are in case II, with corporate taxes and the corporate tax rate is 20%. We are also assuming no bankruptcy costs for this problem. The CFO, Miss Peggy Jameson, is convinced that MMS should recapitalize the firm, borrowing $500 million (for which she believes the firm will be charged 5% interest per year) and using the proceeds to repurchase shares from the common shareholders ($500 million). Assume the new debt is perpetual debt. Calculate the following for MMS: a. The value of the unlevered firm: b. The cost of capital for the unlevered firm: If MMS completes Miss Jameson's recapitalization described above, calculate the following: c. The value of the annual interest tax shield on the new debt: d. The present value of all future interest tax shields on the new debt (PVITS)