Texas Inc. has an EBIT of $450,000 that it expects it will earn forever, and it pays all of its earnings as dividends to shareholders (i.e., no growth). The firm has a corporate tax rate of 40% and has an un-levered beta of .90. The firm has 92,656 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 4% and the S&P/TSX Composite Index is expected to yield 10%. Assume a world of taxes and a cost for the risk of default.
Calculate the value of the firm.
Calculate the WACC for the firm.
What is the value of a share in the company and what is the EPS?
What is the value of the firm if the firm issues $600,000 of bonds at par with a coupon rate of 7.5%? The beta for the equity of the leveraged firm is 1.02.
What is the value of the firm if the firm issues $700,000 of bonds at par with a coupon rate of 8.5%? The beta for the equity of the leveraged firm is 1.40.
What is the optimal level of debt, $600,000 or $700,000? Explain.
What is the WACC for the firm at the optimal level of debt?