Alpha Corporation and Beta Corporation are identical in every way except their capital…

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Question 1 1. Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all equity firm, has 15,000 shares of stock outstanding, currently worth GH¢ 30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is GH¢ 65, 000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of GH¢ 75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. a. What is the value of Alpha Corporation? b. What is the value of Beta Corporation? c. What is the market value of Beta Corporation’s equity? Question 2 Given the following information for Huntington Power Co., find the WACC. Assume the company’s tax rate is 35 percent. Debt: 5,000 6 percent coupon bonds outstanding, GH¢ 1,000 par value, 25 years to maturity, selling for 105 percent of par; the bonds make annual payments. Common stock: 175,000 shares outstanding, selling for GH¢ 58 per share; the beta is 1.10. Market: 7 percent market risk premium and 5 percent risk-free rate. Question 3 You own all the equity of R.G.C. I Ltd. The company has no debt. The company’s annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 35%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. i. What is the value of the unlevered firm? ii. What is the value of the levered firm? iii. Assuming a bankruptcy cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost? Question 4 a. Weston Industries has a debt–equity ratio of 1.5. Its WACC is 11 percent, and its cost of debt is 7 percent. The corporate tax rate is 35 percent. i. What is Weston’s cost of equity capital? ii. What is Weston’s unlevered cost of equity capital? iii. What would the cost of equity be if the debt–equity ratio were 2? What if it were 1.0? What if it were zero? b. Shadow Corp. has no debt but can borrow at 8 percent. The firm’s WACC is currently 11 percent, and the tax rate is 35 percent. i. What is Shadow’s cost of equity? ii. If the firm converts to 25 percent debt, what will its cost of equity be? iii. If the firm converts to 50 percent debt, what will its cost of equity be? iv. What is Shadow’s WACC in part (b)? In part (c)?

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