We are given the following information about a Company X

We are given the following information about a Company X

Debt-Value Ratio – ……………15%

Revenue – ………………$90,000

Cost – ……………………$50,0000

Cost of Debt – ……………5%

Cost of Equity – ……….25%

Shares Outstanding – ..5,000

Corporate Tax – ……..30%

(a) What is the firm’s value?

(b) What is its stock price?

(c) Company Y is a leveraged buyout firm. It believes that Company X’s leverage is too low. It thinks that Company X’s firm value can increase with higher debt-to-value ratio and believes Company X’s optimal debt-to-value ratio is 15%. Company X’s cost of debt at this 15% debt-to-value ratio is 9%. Company Y is considering buying all of Company X’s shares and increase Company X’s leverage to the optimal 15% level. Proceeds from debt issuance will be given out to equity holders as special dividend. What is the maximum premium Company Y is willing to pay for Company X’s shares?

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