Market value of equity?

[Giznick]

Hello,

Could you help me a bit with this one?

There are perfect capital markets. Two firms, X Corporation and Y Corporation, are identical in every way except for their capital structures. X, an all-equity firm, has 0.5 million shares outstanding, each selling for €30. The cost of equity for X is 12%. In addition to equity financing, Y uses leverage; it has bonds outstanding with a face value of €1 000, paying 8% coupons annually, and maturing in 6 years. The yield to maturity on these bonds is 9%. The cost of equity for Y is 13.4%.
1.What is Y's the market value of equity?

2. The number of (Y's) bonds outstanding is?

How can I get the answer for those?

Answers are:
1. 10 million
2. 5 000

Thank you

 

[Deleted member 4993]

Hello,

Could you help me a bit with this one?

There are perfect capital markets. Two firms, X Corporation and Y Corporation, are identical in every way except for their capital structures. X, an all-equity firm, has 0.5 million shares outstanding, each selling for €30. The cost of equity for X is 12%. In addition to equity financing, Y uses leverage; it has bonds outstanding with a face value of €1 000, paying 8% coupons annually, and maturing in 6 years. The yield to maturity on these bonds is 9%. The cost of equity for Y is 13.4%.
1.What is Y's the market value of equity?

2. The number of (Y's) bonds outstanding is?

How can I get the answer for those?

Answers are:
1. 10 million
2. 5 000

Thank you

Please share your work with us, indicating exactly where you are stuck - so that we may know where to begin to help you.

 

[Giznick]

Ohh, I'm sorry. So I have no clue how to even start to calculate that one. I think that it have something to do with
M&M Proposition II. But I don't have E or D so I cant use it. Help :S

 

[rbcc]

so MM with no taxes right?

I don't really know but maybe its something like this

ke=ku+(ku-kd)(D/E)
0.134=0.12+(0.12-0.09)(D/E)
D/E=7/15

so 7E=15D

then

Vu=Vl MM prop 1
VU= 0.5*30=15

Vl= E+D
15=E+D
15-E=D

7E=15(15-E)
7E=225-15E
7E+15E=225
E=10.227M
D=15-10.227=4.773

Price of the bonds is 995.141

P#bonds=value
995.141#=4.773
4996.88 bonds

which maybe after rounding differences is the solutions that you have...but I'm just a student too so I'm not sure

 

[Giznick]

http://www.freemathhelp.com/forum/members/11524-rbccThank you so much rbcc!!!

And denis, you asked that what is my situation with the calc. I said my situation and I didn't say that you need to use M&M I was just thinking that it might be the key. I'm very sorry!!!