InstaTok maintains a debt-equity ratio of 0

Subject:FinancePrice: Bought3

Share With

InstaTok maintains a debt-equity ratio of 0.15, and has an equity cost of capital of 10%, and a debt cost of capital of 3%. InstaTok corporate tax rate is 25%, its number of shares is 1 million and its share price is £40. The amount of excess cash in Instatok is zero.

1. What is the equity value E and the value of debt D of Instatok?

[7 marks]

2. Compute Instatok WACC.

[7 marks]

3. If Instatok’s free cash flow is expected to be £1 million in one year, what constant expected future growth rate is consistent with the firm’s current market value?

[7 marks]

4. Compute Instatok’s asset cost of capital.

[7 marks]

 

5. Compute the value of Instatok’s interest tax shield.

[7 marks]

 

6. Now assume that the company receives a donation of £7 million in cash and this donation enters in the balance sheet of the company as excess cash. Discuss qualitatively what are the effects of this excess cash on the value of the interest tax shield and the effects for the company in general.