02 Jan Current price per
Question 1
20 / 20 pts
Lindbergh Company has the following date related to its capital structure:
CASE A CASE B
EBIT (in perpetuity): $175,000 EBIT (in perpetuity): $175,000
Rate on debt: 4.0 % Rate on debt: 4.0 %
Cost of Equity: 13.0% Cost of Equity: 13.0%
Tax Rate: 35.0% Tax Rate: 35.0%
Debt: 0 Debt: Borrow $135,000 to buy share
Will have debt in perpetuity
What is the value of unlevered firm (Case A) and the levered firm (Case B)
Vu = 875,000; Vl = 922,250
Vu = 875,000; Vl = 880,400
Vu = 1,346,153.85; Vl = 922,250
Question 2
20 / 20 pts
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 equity: $14,450,000
Number of shares outstanding: 250,000
Current price per share: $38.00
Tax rate: 35 %
What is the decrease in firm value due to expected bankruptcy costs?
$3,325,000
$4,950,000
$875,000
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