35 points total Dab Ynapmoc D Y is an all equity perpetual company with 10 million shares outstanding trading at the current P E ratio of 5 Its assets have just produced EBIT per share of 20 and it pays all of its earnings as dividends Its effective tax rate is equal to 40 D Y has only assets in place and thus does not grow 1 2 points What is D Y s cost of capital i e rA and what is its price per share P0 2 D Y is considering issuing 100 million in perpetual debt at a cost of rD 5 to buy back some equity If D Y decides to do the buy back i 1 point What is the value of the levered firm ii 1 point What is the value of equity after the recapitalization iii 2 points What is the price at which equity is repurchased iv 2 points How many shares have to be repurchased v 2 points What is the equity return of the recapitalized levered company vi 1 point What is D Y s WACC 1 3 D Y has decided not to go with the recapitalization i e it is still all equity firm Instead D Y has a new investment opportunity It can reinvest 10 per share for 5 years out of its earnings into developing a new drug After 5 years the drug will be developed The return on the project is 40 r 40 and each 1 of investment pays forever The first investment will be made 1 year from now and the last one will be made in year 5 a 7 points What is the D Y s price per share with the project b 2 points What is D Y s PVGO per share with this project 2 c 8 points D Y now decides to finance its project with debt instead of earnings Specifically it is going to issue 100M one period debt 10 per share cost in year 1 use it to make the investment and then repay the principal plus interest in year 2 Then D Y will repeat the same procedure in years 2 to 5 i e it will issue 100M in debt in year 2 invest and repay it in year 3 then do it again etc Overall D Y will have to make 5 interest payments Use APV to calculate the new price per share with this financing D Y s cost of debt remains at 5 3 d 7 points After some deliberation D Y decides on a different debt contract It will borrow the PV All Investment at 5 use it to finance all five investments and will repay it as a perpetual bond Use APV to calculate the new price per share with this financing 4