MBAA 518 PROBLEM SET 7 DOWNLOAD Question 1 Lindbergh Company has the following date related to its capital structure: CASE A CASE B EBIT (in EBIT (in $175,000 $175,000 perpetuity): perpetuity): Rate on debt: 6.0 % Rate on debt: 6.0 % Cost of Cost of 10.0% 10.0% Equity: Equity: Tax Rate: 35.0% Tax Rate: 35.0% Borrow $135,000 Debt: 0 Debt: to buy share Will have debt in perpetuity What is the value of unlevered firm (Case A) and the levered firm (Case B)
Vu = 1,137,500 Vl = 1,184,750
Vu = 1,137,500 Vl = 1,145,600
Vu = 1,750,000 Vl = 1,184,750
Question 2 Prescott Inc. has the following data regarding its financial structure: Market value of outstanding debt: $2,500,000 Value of firm if financed with all $16,750,000 equity: Number of shares outstanding: 350,000
Current price per share: Tax rate:
$38.00 35 %
What is the decrease in firm value due to expected bankruptcy costs?
$1,825,000
$3,450,000
$875,000