1. Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from? investors, and it has already announced these plans to investors.? Currently, Cisoft is an? all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion.
a. What is the market value of? Cisoft's non-cash? assets?(Round to the nearest? integer.)
b. With perfect capital? markets, what is the market value of? Cisoft's equity after the share? repurchase? What is the value per? share?
2. Mercer Corp. has 10 million shares outstanding and ?$110 million worth of debt outstanding. Its current share price is $ 67$. ?Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue ?$301 million worth of debt. It will use the proceeds from this debt to pay off its existing? debt, and use the remaining ?$191 million to pay an immediate dividend. Assume perfect capital markets.
a. Estimate? Mercer's share price just after the recapitalization is? announced, but before the transaction occurs.? (Round to the nearest? dollar.)
b. Estimate? Mercer's share price at the conclusion of the transaction. ?(Hint?: Use the market value balance? sheet.)
c. Suppose? Mercer's existing debt was? risk-free with a 4.68 % expected? return, and its new debt is risky with a 4.88 % expected return. Estimate? Mercer's equity cost of capital after the transaction.
3. Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The? firm's capital expenditures equal its depreciation expenses each? year, and it will have no changes to its net working capital. The? risk-free interest rate is 7 %.
a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the? firm's equity??(Round to the nearest? dollar.)
b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of? equity? What is the value of? debt?
c. What is the difference between the total value of the firm with leverage and without? leverage?
d. The difference in ?(c?) is equal to what percentage of the value of the? debt?
4. Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In? addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose? Rumolt's equity cost of capital is 12%?, and its debt cost of capital is 5%.
a. What is? Rumolt's pretax weighted average cost of? capital?(Round to two decimal? places.)
b. If? Rumolt's corporate tax rate is 38%?, what is its? after-tax weighted average cost of? capital?
5. Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure.?Markum's corporate tax rate is 38 %.
a. Absent personal? taxes, what is the value of the interest tax shield from the new? debt? (million-? (Round to two decimal? places
b. If investors pay a tax rate of 45 % on interest? income, and a tax rate of 20 % on income from dividends and capital? gains, what is the value of the interest tax shield from the new? debt?
6- With its current? leverage, Impi Corporation will have net income next year of $ 6.0 million. If? Impi's corporate tax rate is 30 % and it pays 7 % interest on its? debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next? year? million. ?(Round to three decimal? places.)