27 Dec Joe Schmoe & Co expects its dividends to be $85,00
Joe Schmoe & Co expects its dividends to be $85,000 every other year forever, with the first payment occurring two years from today. The firm can borrow at an EAR of 11%, currently has no debt, and has an effective annual cost of equity of 18%. The corporate tax rate is 35%. Assume tax credits for losses and no financial distress costs.(a) Calculate the value of the firm.(b) What will firm value be if it borrows $60,000 in permanent debt with annual coupon payments and uses the proceeds to repurchase its shares?Question 1You are evaluating two alternative financing arrangements. The first arrangement requires twenty annual payments with the first payment of $10,000 made in a year, while the second arrangement requires that each payment be made a year earlier but is otherwise similar to the first arrangement.(a) If payments subsequent to the first increase at an annual rate of 5%, and the financiers require a 10% return on both arrangements, calculate how much more capital the financiers would be willing to provide under the second arrangement.(b) If payments are level, and the financiers require a 10% return on both arrangements, calculate how much more capital would the financiers be willing to provide under the second arrangement?