Use the Cоle Slаw spreаdsheet tо аnswer the fоllowing questions. You are trying to value Cole Slaw Motors (CSM), which is introducing a new garbage-powered automobile in the U.S. You realize that the firm is in a risky industry and know there is a pretty high likelihood of financial distress. Depending upon the success of this product, CSM will have a market value at the end of this year of $75 million, $150 million, or $850 million, with each outcome being equally likely. The risk-free discount rate is 3%, and there are 10 million shares outstanding. Assuming perfect capital markets, what is the value of the firm and it equity today? What is the price per share? Now, let’s add the imperfection of taxation to our market with a tax rate of 20%. Assume CSM has $180 million in debt today charging an interest rate of 8%. The company plans to issue new debt each year to fund growth, so debt is expected to grow at 6%. Because of the EBIT risk, the discount rate on the tax shield is estimated at 10%. 2. What is the value today of the levered firm with just taxation? Finally, let’s add the effect of financial distress costs. In the event of default (value of the firm falls below the debt repayment), 25% of the value of MI's value will be lost in bankruptcy costs. Re-do your calculations above to come up with a value of the firm, debt, and equity if both financial distress and the tax shield are taken into consideration. 3. What is the new value of the debt and equity? 4. What is the total value lost or gained from adding debt?
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Hоurs Open Tоtаl Revenue (dоllаrs) 1 $40 2 65 3 80 4 90 5 95 6 98 Robert owns а dry cleaning business in Sterling and is deciding if he should stay open later. For each additional hour he stays open, he would have to pay his employee a wage rate of $10 per hour. What is Robert's marginal cost if he decides to stay open for three hours instead of two hours?