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$4.00 Margolin company - value of firm/cost equity/firms value
- From Economics: General-Economics , Economics: General-Economics
- Closed, but you can still post tutorials
- Due on Feb. 03, 2008
- Asked on Jan 23, 2008 at 7:38:06PM
Q:See Attachment:
Background Info:
Company = Margolin Corp.
Type = Zero-Growth Firm
Expected EBIT = $240,000
Corporate Income Tax Rate = 35%
Financing = $500,000 of debt financing.
Cost of Equity for an all-equity firm in the same risk class is 15%.
A. What's the value of the firm according to the MM model with corporate taxes ? (See Below)
I have computed it to be
240,000(.65)/.15= $ 1,040,000
B. If the firm's debt cost is 10%, the firms cost of equity will be ?
Please show me why I came out with the wrong answer.
Here’s what I did:
VL=VU=EBIT/KSU
VL= 240,000 / .15 = 1,600,000
S=V-D
S=1,600,000 - 500,000 = 1,100,000
KSL=KSU+(KSU-KD)(D/S)
KSL=.15+(.15-.10)(500,000/1,100,000)
KSL= .15+(.015)(.455)
KSL= .156 = 15.6%
C. Investors in the company are taxed at an average of 25% on both interest and income from stocks. The firm's value, according to Miller's Model is ?
Please show me where I went wrong on this one also;
Vu = EBIT(1-T) / KSU
Vu = 240,000(1-.10) / .15
Vu = 216,000 / .15 = 1,440,000
Attachments:
Margolin.txt (1K)
