Business & Finance Homework Help

Caviar Fishfarm Ltd (‘CFL’) is unlevered, (all equity) has an equity beta of 1.25 and unlevered cash flows of

$76,800 per annum that will continue in perpetuity.

The expected market return is 10%p.a and Treasury bills earn 2%p.a.

CFL is currently considering issuing $300,000 in new debt with an 8% interest rate. CFL would repurchase $300,000 of its own shares, using the proceeds of the debt issue. There are currently 32,000 shares outstanding and the company’s effective marginal tax rate is 34%.

 The value of a share in the company before it announces the capital restructure is closest to: 

Select one:

a. $18.87

b. $20.00

c. $13.20

d. $22.00

EBIT = $ 76800( 1= 0. 34 )116363. 64Before ReconstructionAfterReconstructionEBIT116363+ 6411 6 363 . 6494000( 30 0 0 0 0 X 8 % )EBT116363.6492363. 67( – Han @ 34 %39563, 6431403 ….