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1. Consider the following share repurchase proposal: Blaine will use $209 million of cash from its balance sheet and $50 million in new debt-bearing interest at the rate of 6.75% to repurchase 14.0 million shares at a price of $18.50 per share. • • Calculate the present value of the interest tax shield associated with the new level of debt. If we consider cash as negative debt, what is the actual change in debt? What would be the present value of the interest tax shield associated with this level of debt? 1 Marginal Tax Rate Market Risk Premium 10-year Treasury 2. Use the information given here to answer the next set of questions Debt Relationships FY 2006 EBIT Interest Expense Coverage Ratio Estimated Cost of Debt Implied Debt AAA 73,860 4765 15.5x ? ? AA73,860 6423 11.5x ? ? Interest Coverage Ratio > 13.0 9.5 - 12.0 7.0 - 9.5 5.0 - 7.0 4.0 - 5.0 2.5 - 4.0 A 73,860 8028 9.2x ? ? BBB+ 73,860 10551 7.0x ? ? 40% 5% 5.02% Debt Default Rating Spread AAA 0.65% AA0.80% A 0.85% BBB+ 1.83% BB 2.98% B+ 4.10% BB 73,860 14069 5.3x ? ? B+ 73,860 17420 4.2x ? ? 2 For each credit rating a. b. c. d. e. f. g. h. Estimate the cost of debt associated Estimate the dollar amount of debt Estimate D/E and D/V Estimate the (re)levered beta Calculate the cost of equity Calculate the cost of debt Calculate the WACC Calculate the value of the firm 3 3. Give a summary recommendation for BKI. At minimum, the recommendation should contain • • • • The recommended level of debt, and why this would be advantageous for the company. The total amount of shares to be repurchased. The new capital structure. The new cost of equity, cost of debt, and WACC. 4