Question: 1. Milano Pizza Club owns three identical restaurants popular for their specialty pizzas. Each restaurant has a debt-equity ratio of 30 percent and makes interest payments of $50,000 at the end of each year. The cost of the firm's levered equity is 20 percent. Each store estimates that annual sales will be $1.48 million; annual cost of goods sold will be $760,000; and annual general and administrative costs will be $495,000. These cash flows are expected to remain the same forever. The corporate tax rate is 40 percent.
a. Use the flow to equity approach to determine the value of the company's equity. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value of the company's equity $
b. What is the total value of the company? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value of the company $
2. If Wild Widgets, Inc., were an all-equity company, it would have a beta of 1.3. The company has a target debt-equity ratio of .4. The expected return on the market portfolio is 10 percent, and Treasury bills currently yield 3.9 percent. The company has one bond issue outstanding that matures in 20 years and has a coupon rate of 8.8 percent. The bond currently sells for $1,170. The corporate tax rate is 35 percent.
a. What is the company's cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of debt %
b. What is the company's cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of equity %
c. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
WACC %
3. Watson, Inc., is an all-equity firm. The cost of the company's equity is currently 11 percent, and the risk-free rate is 5.1 percent. The company is currently considering a project that will cost $11.88 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.36 million.
If the company has a tax rate of 35 percent, what is the net present value of the project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Net present value $
4. Dorman Industries has a new project available that requires an initial investment of $5.2 million. The project will provide unlevered cash flows of $745,000 per year for the next 20 years. The company will finance the project with a debt-to-value ratio of .45. The company's bonds have a YTM of 6.7 percent. The companies with operations comparable to this project have unlevered betas of 1.22, 1.15, 1.37, and 1.32. The risk-free rate is 3.7 percent, and the market risk premium is 6.9 percent. The company has a tax rate of 35 percent.
What is the NPV of this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV $
5. Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $21.2 million in perpetuity. The current required return on the firm's equity is 16 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.32 million shares of common stock outstanding and is subject to a corporate tax rate of 35 percent. The firm is planning a recapitalization under which it will issue $30.2 million of perpetual 9.2 percent debt and use the proceeds to buy back shares.
a-1. Calculate the value of the company before the recapitalization plan is announced. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Current value $
a-2. What is the price per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price per share $
b-1. Use the APV method to calculate the company value after the recapitalization plan is announced. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value after recapitalization $
b-2. What is the price per share after the recapitalization is announced? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price per share $
c-1. How many shares will be repurchased? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Shares repurchased
c-2. What is the price per share after the recapitalization and repurchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Price per share $
d. Use the flow to equity method to calculate the value of the company's equity after the recapitalization. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Value of the equity $
6. Mojito Mint Company has a debt-equity ratio of .35. The required return on the company's unlevered equity is 11 percent, and the pretax cost of the firm's debt is 8.8 percent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of $19,300,000. Variable costs amount to 70 percent of sales. The tax rate is 35 percent, and the company distributes all its earnings as dividends at the end of each year.
a. If the company were financed entirely by equity, how much would it be worth? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of the company $
b. What is the required return on the firm's levered equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Required return %
c-1. Use the weighted average cost of capital method to calculate the value of the company. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of the company $
c-2. What is the value of the company's equity? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of equity $
c-3. What is the value of the company's debt? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of debt $
d. Use the flow to equity method to calculate the value of the company's equity. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Value of equity $