Currently, the firm is all equity funded with 500000 shares valued at $10 per share and the required return on equity is 15.6%. Income tax rate is 40%. Your banker has indicated that the following leverage restructurings are possible:
Debt Leverage 10.00% 20.00% 30.00%
Interest 8.50% 9.00% 9.50%
ROE 16.00% 17.00% 19.00%
Please do on Excel spreadsheet and show formulas and functions.
1. Estimate the share prices for the following debt restructures 10%, 20%, and, 30%, respectively:
A $10.44; $10.68; $10.48
B $10.68; $10.48; $10.44
C $10.68; $10.44; $10.48
D $10.48; $10.68; $10.44
E $10.44; $10.48; $10.68
2. Estimate which two debt restructures maximize firm value.
A 0%; 10%
B 20%; 30%
C 30%; 0%
D 10%; 20%
E 0%; 20%