Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Question 3 Simin Co
Question 3 Simin Co. will have an EBIT of 3,496,789 EUR next year, the EBITDA will grow by 12.45% for the subsequent 2 years (until year 3). From then on, the EBITDA will grow perpetually at a 2.35% rate. The company has a perpetual risk-free debt of 13,500,000 EUR and the risk free rate is equal 3.75%. The company has assets that have a residual value of 15,000,000 that will be depreciated straight line in the next 3 years. Assuming that the depreciation tax shield has no systematic risk, that the corporate tax rate is 26% and that the unlevered equity return is 9.05%, the value of the depreciation tax shield is closest to A) 3,624,804 EUR B) 3,287,753 EUR C) 2,905,009 EUR D) 2,780,050 EUR E) I choose not to answer Question 4 Consider the information in Question 3. What is the value of Simin's equity? A) 91,513,109 Euro B) 95, 987,009 Euro C) 100,886,829 Euro D) 105.134.440 Euro E) I choose not to answer
ANSWER -
Q3)
| Value of the depreciation tax shield is : | ||
| Residual value, ie carrying value = | 15000000 | |
| Depn./Yr.(st.line)---------(15000000/3)= | 5000000 | |
| Depn. Tax shield/yr.----(5000000*26%)= | 1300000 | |
| PV of depn. Tax shield at the unlevered cost of equity= | 1300000*(1-1.0905^-3)/0.0905= | |
| 3287753 | ||
| Wts.to total | ||
| Debt | 13500000 | 90% |
| Equity (balance) | 1500000 | 10% |
| Total assets (residual value-given) | 15000000 | 100% |
| As per MM theory with taxes, | ||
| k(Lev.E)=k(UnLE)+(D/E(1−Tax rate)*(k UnLE-kd)) | ||
| k(Lev.E)=9.05%+((90%/10%)*(1-26%)*(9.05%-3.75%)) | ||
| 44.35% | ||
| & we have the cost of debt kd as | ||
| 3.75% | ||
| Now, | ||
| WACC=(Wt.d*kd*(1-Tax rate))+(Wt. e*ke) | ||
| ie.(90%*3.75%*(1-26%))+(10%*44.35%)= | ||
| 6.93% | ||
| So, | ||
| PV of depn. Tax shield at the WACC , 6.93% | 1300000*(1-1.0693^-3)/0.0693= | |
| 3415979 |
