Accounting : Sarvon Systems has a debt-equity ratio ot1.2

Subject: Business / Accounting
Question
Sarvon Systems has a debt-equity ratio ot1.2. an equity beta of 1.7, and a debt beta of 0.2V. It currently is evaluating the following projects, a , none of which would change the ?rm’s volatility (amounts in $ millions).
3. Which project will equity holders agree to fund?
I). What is the cost to the ?rm of the debt overhang? it. Which project will equity holders agree to fund? (Select from the drop-down menus.) Project A B C D E
v v v Accept? 7 b. What is the cost to the ?rm of the debt overhang? The cost to the ?rm of the debt overhang is $|:l miltion. (Round to the nearest integer.) Enter your answer in the answer box.

29.0 pts possible {I Petron Corporation’s management team is meeting to decide on a new corporate strategy. There are four options. each with a different probability of success and
total ?rm value in the event of success. as shown here: a . Assume that for each strategy. ?rm value is zero in the event of failure. Also. suppose Petron Corp.
must pay a 25% tax rate on the amount of the ?nal payoff that is paid to equity holders. It pays no tax on payments to, or capital raised from. debt holders. a. Which strategy will Patron choose with no debt? Which will it choose with a face value of $9 million. $31 million. or $53 million in debt? (Assume management maximizes the value of equity. and in the case oftjes. will choose the safer strategy.)
h. Given your answer to (a). show that the total combined value of Petron’s equity and debt is maximized with a face value of $53 million in debt.
0. Show that if Petron has $31 million in debt outstanding, shareholders can gain by increasing the face value of debt to $53 million. even though this will reduce the total value of the ?rm.
d. Show that if Patron has $53 million in debt outstanding, shareholders will lose by buying back debt to reduce the face value of debt to $31 million, even though
that will increase the total value of the firm. a. Which strategy will F’etron choose with no debt? Which will it choose with a face value of $9 million. $31 million. or $53 million in debt? (Assume management
maximizes the value of equity. and in the case of ties. will choose the safer strategy.) Calculate the equity values below (millions): (Round to two decimal places.) Equity Value
Debt Face Value A B 0
$0 stfl sl—l $l—l tl—l (Round to two decimal places.) Equity Value Debt Face Value A B C
$9 $:I $: $|:| t:
(Round to two decimal places.) Equity Value
Debt Face Value A B C
W
(Round to two decimal places.)
Equity Value
Debt Face Value A B c D
$53 s i j s i | isi j 5 (Select the best choice below.) 0 A. The ?rm will choose strategy D when D = $0 million. 0 when D = $9 million. B when D = $31 million. and D when D =$53 million.
0 B. The ?rm will choose strategy D when D = $0 million. C when D = $9 million. D when D = $31 million, and B when D = $53 million.
0 C. The ?rm will choose strategy B when D= $0 miltion, D when D = $9 million. D when D = $31 million, and C when D =$53 million.
0 D. The ?rm will choose strategy B when D= $0 million. C when D = $9 million. D when 0 = $31 million, and D when D = $53 million. h. Given your answer to (a). show that the total combined value oi Petron’s equity and debt is maximized with a face value of $53 million in debt. Calculate the total value of the ?rm: (Round to two decimal places.) Debt Face Value $0
Debt Value $ 😐
Equity Value 😐
Firm Value 3 😐 (Round to two decimal places.) Debt Face Value $9
Debt Value $ 😐
Equity Value 😐
Firm Value 9y 😐 (Round to two decimal places.) Debt Face Value $31 Enter any number in the edit fields and then continue to the next question.

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