Project #18589 - Finance Homework

Assignment 4

Strawberry Shortcake

 

The assignment is to be solved either individually or in groups of two students. Each group should submit its original work on Canvas, before 11am on Wednesday, December 4th, 2013.

Two files are required:

  • An Excel spreadsheet (LastName1andLastName2A4.xlsx) showing your work. Please make sure your formulas are verifiable.
  • A Word file (LastName1andLastName2A4.docx) taking the form of a report. Please explain your calculations.

If there are two students in a group, only one student should make a submission. However, the submitted files should show both students’ full names and IDs.

 

 

Strawberry Shortcake

 

The managers of Strawberry Shortcake want to finance their company by issuing equity. But before doing so, they would like to know the impact of this new equity issue on the value of the company. The analysis is complicated by the fact that managers believe they could qualify for a tax break program designed for agricultural companies. However, there is a chance that this tax break program may not apply to the company. For this reason, managers want you to analyze various scenarios.

 

  • Currently, the company’s EBIT is $500,000 and their tax rate is 30%. Assume that the EBIT will remain constant indefinitely.

 

  • You believe that once the project is completed, the company’s required rate of return on equity will be 16% if the company gets the tax break (i.e. if it does not pay any taxes).

 

  • However, if the company does not get the tax break, the company’s required rate of return on equity will be 17% upon project completion.

 

  • The cost of debt, once the project is completed, will be 7% whether or not the company gets the tax break.

 

  • Whether or not the company gets the tax break, the Debt/Asset ratio will be 5/14 once the project is completed.

 

  • There is no cost of bankruptcy.

 

a)     If the company gets the tax break and that it pays no taxes for the foreseeable future, what would be its market value if it had no debt?

 

b)     If the company gets the tax break and that it pays no taxes for the foreseeable future, what will be its market value given the debt ratio above?

 

c)      If the company does not get the tax break and that it pays taxes for the foreseeable future, what would be its market value if it had no debt?

 

If the company does not get the tax break and that it pays taxes for the foreseeable future, what will be its market value given the debt ratio above?

Subject Business
Due By (Pacific Time) 12/04/2013 07:00 am
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