Finance HW

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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?

 

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)

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