MM without Taxes (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THATN IN TEXTBOOK)
Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 7% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $1 million, and (4) the cost of equity to Company U is 10%.
a. What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
Company U $ ________ million Company L $ ________ million
b. What is rs for Firm U? Round your answer to two decimal places.
________ %
What is rs for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
________ %
c. Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
$ ________ million
d. What is the WACC for Firm U? Round your answer to one decimal place.
________ %
What the WACC for Firm L? Round your answer to one decimal place.
________ %
e. Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
_________________
MM without Taxes (PLEASE NOTE THAT NUMBERS ARE DIFFERENT THATN IN TEXTBOOK)
Companies U and L are identical in every respect except that U is unlevered while L has $8 million of 7% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $1 million, and (4) the cost of equity to Company U is 10%.
a. What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
| Company U | $ ________ million |
| Company L | $ ________ million |
b. What is rs for Firm U? Round your answer to two decimal places.
________ %
What is rs for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
________ %
c. Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
$ ________ million
d. What is the WACC for Firm U? Round your answer to one decimal place.
________ %
What the WACC for Firm L? Round your answer to one decimal place.
________ %
e. Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
_________________
Related questions
Companies U and L are identical in every respect except that U is unlevered while L has $11 million of 7% bonds outstanding. Assume that (1) there are no corporate or personal taxes, (2) all of the other MM assumptions are met, (3) EBIT is $2 million, and (4) the cost of equity to Company U is 10%.
a. What value would MM estimate for each firm? Enter your answers in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to two decimal places.
| Company U | $ _____ million |
| Company L | $ _____ million |
b. What is rs for Firm U? Round your answer to two decimal places.
_____ %
What is rs for Firm L? Do not round intermediate calculations. Round your answer to two decimal places.
_____ %
c. Find SL. Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
$ _____ million
d. What is the WACC for Firm U? Round your answer to one decimal place.
_____ %
What the WACC for Firm L? Round your answer to one decimal place.
_____ %
Suppose VU = $20 million and VL = $22 million. According to MM, are these values consistent with equilibrium?
-Select- Yes or No
Compressed APV with Nonconstant Growth
Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 6% rate. Sheldonâs unlevered cost of equity is 13% its tax rate is 35%.
| Year | |||
| 1 | 2 | 3 | |
| Free cash flow ($ millions) | $20 | $30 | $40 |
| Interest expense ($ millions) | $8 | $9 | $10 |
A) What is Sheldonâs unlevered horizon value of operations at Year 3? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.
B) What is the current unlevered value of operations? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.
C) What is horizon value of the tax shield at Year 3? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.
D) What is the current value of the tax shield? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.
E) What is the current total value of the company? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Do not round intermediate calculations. Round your answer to two decimal places.
