In answering Questions 1 and 2, please assume that there are no personal taxes or costs of financial distress, and that markets are semi-strong efficient. 1) Texas Inc. has 10 million shares...

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In answering Questions 1 and 2, please assume that there are no personal taxes or costs of financial distress, and that markets are semi-strong efficient. 1) Texas Inc. has 10 million shares outstanding, with a market price of $37.50 per share. It also $125 million of perpetual debt outstanding, bearing an interest rate of 4%. The firm earns annual net income of $42 million. Shareholders require a return of 11.2% and the company pays taxes at a 40% rate. a) Calculate the enterprise value of Texas. b) What return would Texas’s shareholders require if the company were unlevered? c) The company now announces its intent to sell shares to raise enough money to retire all of its outstanding debt. What should the company’s share price be after it announces this plan? d) How many new shares must the company issue to raise the funds for this recapitalization? e) What will projected earnings per share be once the recapitalization is complete? 2) Dover, Inc. is considering the purchase of a new piece of manufacturing equipment which costs $30 million. The equipment, which will last five years and have zero salvage value, will be depreciated on a straight-line basis. Output from the machinery will generate pre-tax revenue less cash costs of $8 million in the first year, growing at 3% per year over the life of the asset. The company is in the 40% corporate tax bracket, and uses an asset (unlevered equity) discount rate of 10% for such projects. a) Should Dover go forward with the project if it finances the entire cost of the investment with internal equity? b) Dover will finance half of the equipment cost from internal equity, and the other half using 5-year unamortized debt financed at a market rate of 7%. Calculate the APV of the purchase of the equipment.