Wild Berry (WB) will remain in business for one more year. At the end of next year, the firm will generate a liquidating cash flow of $370M in a boom year and $150M in a recession year; both states are equally likely. The cost of equity for the unlevered firm is rU = 10%. The firm’s outstanding debt matures in a year and has a market (and book) value of $150M today. The interest payment on this debt is $15M at the end of next year. The corporate tax is ?c = 35%. Corporate taxes is the only relevant market imperfection.
1. What is WB’s value as an unlevered firm (VU )?
(A) $ 236.4M
(B) $ 260.0M
(C) $ 336.4M
(D) $ 370.0M
2. Given the value of debt today, the cost of debt (rD) is: hint: the promised debt payment in a year is the book value plus interests.
(A) 4.5%
(B) 5.0%
(C) 5.5%
(D) 10.0%
3. If the discount rate for the interest tax shield is rIT S = 5%, the value of the interest tax shield (P V (IT S)) is:
(A) $ 2.5M
(B) $ 5.0M
(C) $ 6.0M
(D) $ 7.5M