Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / A company has a market value of equity of $526,010, and a market value of debt of $436,120
A company has a market value of equity of $526,010, and a market value of debt of $436,120. The company's levered cash flow (i.e. cash flow after paying all interest) is $80,112 and is distributed annually as dividends in full. The interest rate on the debt is 9.71%. You own $63,885 worth of the market value of the company's equity. Assume that the cash flow is constant in perpetuity, there are no taxes, and you can borrow at the same rate that the company can. Suppose the company decides to pay down its entire debt by issuing new equity at the current share prices. If you want to maintain your net cash flow that was being received before this restructuring without investing any more of your own money, how much must you borrow to buy additional shares in the company?
Question 13 options:
$51,643
$52,968
$54,292
$55,616
$56,940
Computation of Amount You must borrow to buy additional shares in the company:
Given,
Market Value of Equity = $526,010
Market Value of Equity Owned = $63,885
% of Equity Owned= Market Value of Equity Owned/Market Value of Equity
= $63,885/$526,010
= 12.15%
Market Value of Debt= $436,120
(Company decided to pay down its entire debt by issuing new equity)
Amount borrow to buy additional shares = Market Value of Debt*% of Equity Owned
= $436,120*12.15%
= $52,967.67 or $52,968
