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Overnight Publishing Company (OPC) has $3.2 million in excess
cash. The firm plans to use this cash 1 answer below » View complete question » Overnight Publishing Company (OPC) has $3.2 million in excess
cash. The firm plans to use this cash either to retire all of its
outstanding debt or to repurchase equity. The firmAc€?cs debt is held
by one institution that is willing to sell it back to OPC for $3.2
million. The institution will not charge OPC any transaction costs.
Once OPC becomes an all-equity firm, it will remain unlevered
forever. If OPC does not retire the debt, the company will use the
$3.2 million in cash to buy back some of its stock on the open
market. Repurchasing stock also has no transaction costs. The
company Overnight Publishing Company (OPC) has $3.2 million in excess
cash. The firm plans to use this cash either to retire all of its
outstanding debt or to repurchase equity. The firmAc€?cs debt is held
by one institution that is willing to sell it back to OPC for $3.2
million. The institution will not charge OPC any transaction costs.
Once OPC becomes an all-equity firm, it will remain unlevered
forever. If OPC does not retire the debt, the company will use the
$3.2 million in cash to buy back some of its stock on the open
market. Repurchasing stock also has no transaction costs. The
company will generate $1,370,000 of annual earnings before interest
and taxes in perpetuity regardless of its capital structure. The
firm immediately pays out all earnings as dividends at the end of
each year. OPC is subject to a corporate tax rate of 36 percent,
and the required rate of return on the firmAc€?cs unlevered equity is
16 percent. The personal tax rate on interest income is 20 percent,
and there are no taxes on equity distribution. Assume there are no
bankruptcy costs. a. What is the value of OPC if it chooses to retire all of its debt
and become an unlevered firm? (Enter your answer in
dollars, not millions of dollars (e.g., 1,234,567). Do not round
intermediate calculations.) Value of OPC $ b. What is the value of OPC if it decides to repurchase stock
instead of retiring its debt? ( Hint : Use the equation for
the value of a levered firm with personal tax on interest income
from the previous problem.) (Enter your answer in dollars,
not millions of dollars (e.g., 1,234,567). Do not round
intermediate calculations and round your final answer to the
nearest whole dollar amount (e.g., 32).) Value of OPC $ c. What is the value of OPC if the expected bankruptcy costs have a
present value of $470,000? (Do not round intermediate
calculations and round your final answer to the nearest whole
dollar amount (e.g., 32).) Value of OPC
unlevered $ Value of OPC
levered $ View less » Aug 05 2015 07:13 AM
