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 costs of equity for various levels of debt.
EBIT =
500,000
Tax Rate
40%
Share
Debt
Rd
Re
Net Inc
Equity Value
Firm Value
% Debt
WACC
Price
0
6.00%
9.00%
300,000
3,333,333
3,333,333
0.00%
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%
12.50%
XXXX
3,584,000
8.37%
2,500,000
10.00%
14.50%
3,000,000
12.00%
17.00%
84,000
XXXX
85.86%
17.47
22. What will their Net Income be if they issue $2,000,000 in debt?
a. $158,000 b. $172,000 c. $198,000 d. $216,000
23. What will their WACC be if they issue $1,500,000 in debt?
a. 8.23% b. 8.30% c. 8.36% d. 8.42%
24. What will their Share Price be if they issue $500,000 in debt?
a. $16.94 b. $17.12 c. $17.45 d. $17.72
25. What is the value of the firm�s equity if they issue $3,000,000 worth of debt?
a. 500,000 b. 1,500,000 c. 2,000,000 d. 2,500,000
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 costs of equity for various levels of debt.
| EBIT = | 500,000 | Tax Rate | 40% | Share | ||||
| Debt | Rd | Re | Net Inc | Equity Value | Firm Value | % Debt | WACC | Price |
| 0 | 6.00% | 9.00% | 300,000 | 3,333,333 | 3,333,333 | 0.00% | 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% | 12.50% | XXXX | 3,584,000 | 8.37% | |||
| 2,500,000 | 10.00% | 14.50% | ||||||
| 3,000,000 | 12.00% | 17.00% | 84,000 | XXXX | 85.86% | 17.47 |
22. What will their Net Income be if they issue $2,000,000 in debt?
a. $158,000 b. $172,000 c. $198,000 d. $216,000
23. What will their WACC be if they issue $1,500,000 in debt?
a. 8.23% b. 8.30% c. 8.36% d. 8.42%
24. What will their Share Price be if they issue $500,000 in debt?
a. $16.94 b. $17.12 c. $17.45 d. $17.72
25. What is the value of the firm�s equity if they issue $3,000,000 worth of debt?
a. 500,000 b. 1,500,000 c. 2,000,000 d. 2,500,000
