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Caviar Fishfarm Ltd (‘Cfl’) Is Unlevered (All Equity) Has An Equity Beta Of 1 25 And Unlevered Cash Flows Of

Question

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. 64
Before Reconstruction
After
Reconstruction
EBIT
116363+ 64
11 6 363 . 64
94000
( 30 0 0 0 0 X 8 % )
EBT
116363.64
92363. 67
( – Han @ 34 %
39563, 64
31403 ….Finance