Mojito Mint Company has a debt–equity ratio of .20. The required return on the c

Question

Mojito Mint Company has a debt–equity ratio of .20. The required return on the company’s unlevered equity is 13 percent, and the pretax cost of the firm’s debt is 8.7 percent. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $19,200,000. Variable costs amount to 60 percent of sales. The tax rate is 34 percent, and the company distributes all its earnings as dividends at the end of each year.

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))

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))

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))

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))

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))

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))

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))

Explanation / Answer

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 = (Sales - Variable costs)*(1-tax rate)/unlevered equity

Value of the company = (19200000 - 19200000*60%)*(1-34%)/13%

Value of the company = $ 38,990,769.23

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 on the firm’s levered equity = unlevered equity + D/E * (unlevered equity - Cost of Debt)*(1-tax rate)

Required return on the firm’s levered equity = 13% + 0.20*(13% - 8.7%)*(1-34%)

Required return on the firm’s levered equity = 13.57%

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))

weighted average cost of capital = 1/(1+ debt–equity ratio) * Cost of Equity + debt–equity ratio/(1+ debt–equity ratio) * Cost of Debt*(1-tax rate)

weighted average cost of capital = 1/(1+0.20) * 13.57% + 0.20/(1+0.20) *8.7*(1-34%)

weighted average cost of capital = 12.265%

Value of the company = (Sales - Variable costs)*(1-tax rate)/weighted average cost of capital

Value of the company = (19200000-60%*19200000)*(1-34%)/12.265%

Value of the company = $ 41,327,354.26

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