Mojito Mint Company has a debt–equity ratio of .25. The required return on the c

Question

Mojito Mint Company has a debt–equity ratio of .25. The required return on the company’s unlevered equity is 15 percent, and the pretax cost of the firm’s debt is 7.4 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $17,900,000. Variable costs amount to 65 percent of sales. The tax rate is 35 percent, and the company distributes all its earnings as dividends at the end of each year. a. If the company were financed entirely by equity, how much would it be worth? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the company $ b. What is the required return on the firm’s levered equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Required return % c-1. Use the weighted average cost of capital method to calculate the value of the company. (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of the company $ c-2. What is the value of the company’s equity? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of equity $ c-3. What is the value of the company’s debt? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of debt $ d. Use the flow to equity method to calculate the value of the company’s equity. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Value of equity $

Explanation / Answer

Mojito Mint Company a) Sales Revenue $    17,900,000.00 Variable Cost $    11,635,000.00 EBIT $       6,265,000.00 Tax @35% $       2,192,750.00 Unleavered after tax $       4,072,250.00 Value of unleavered Firm $    27,148,333.33 b) The required return on the equity of an unleavered firm 0.15 The required return on the equity of an leavered firm The pretax cost of debt 0.074 Debt to equity ratio 0.25 Tax Rate 0.35 .15+.25(.15-.074)(1-.35) 0.162 c) The firms debt to value ratio= 0.25 The firms equity to value ratio= 0.75 .25*.074*(1-.35)+.75(.15) 0.125 Weighted average cost of capital 12.5 % Use the weighted average cost of capital the firm's unleaverd after tax cost of earnings. $    32,702,268.62 The Value of Equity= $    24,526,701.47 The Value of Debt= $       8,175,567.16 Interest on Debt= $          604,991.97 d) Sales Revenue $    17,900,000.00 Variable Cost $    11,635,000.00 EBIT $       6,265,000.00 Interest $          604,991.97 Pretax Earning $       5,660,008.03 Taxes @35% $       1,981,002.81 Value of leavered Firm $       3,679,005.22 The value of Equity $    24,526,701.47

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.