Chaney Corp. has an EBIT of $1.28 million per year that is expected to continue in perpetuity. The unlevered cost of
Chaney Corp. has an EBIT of $1.28 million per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 15%, and the corporate tax rate is 34%. The company also has a perpetual bond issue outstanding with a market value of $2.09 million. What is the value of Chaney? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). Value of Chaney 2. Sean Davis is the owner, president, and primary salesperson for Davis Manufacturing. Because of this, the company's profits are driven by the amount of work Sean does. If he works 40 hours each week, the company's EBIT will be $614,000 per year; if he works a 50-hour week, the company's EBIT will be $734,000 per year. The company is currently worth $3.8 million. The company needs a cash infusion of $1.7 million, and it can issue new equity or issue debt with an interest rate of 11%. Assume there are no corporate taxes. What are the cash flows to Sean under each of the four scenarios? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). *This is an indirect agency cost issue. Note which form of financing provides an incentive for Sean to work harder 40 hr. week CF if debt is issued 50 hr. week CF if debt is issued 40 hr. week CF if equity is issued 50 hr. week CF if equity is issued 3. Cao Inc., has debt outstanding with a face value of $7.2 million. The value of the firm if it were entirely financed by equity would be $19.7 million. The company also has 300000 shares of stock outstanding that sell at a price of $40 per share. The corporate tax rate is 31%. What is the decrease in the value of the company due to expected bankruptcy costs (L)? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). Decrease in value due to bankruptcy risk 4. Economists at The Wells Corporation estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Wells must choose between two mutually exclusive projects. Assume that the project Wells chooses will be the firm’s only activity and that the firm will close one year from today. Wells is obligated to make a $4,500 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low Volatility Payoff High Volatility Payoff Bad 0.5 4105 3896 Good 0.5 5255 5906 What is the expected value of the firm if the low volatility project is undertaken? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). What is the expected value of the firm if the high volatility project is undertaken? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). What is the expected value of the firm’s equity if the low volatility project is undertaken? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). What is the expected value of the firm’s equity if the high volatility project is undertaken? (Round intermediate calculations to 5 decimal places. Round answer to the nearest whole dollar). *This is an indirect agency cost issue. Note which project adds the most value to the firm vs. which project is more likely to be undertaken by the firm’s equity holders. Firm value with low volatility project Firm value with high volatility project Equity value with low volatility project Equity value with high volatility project
