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Pennsylvania Steel, one of the largest steel companies in the united States, is considering whether it has any excess debt capacity. The company has $527 million in market value of debt outstanding and $1.76 billion of market value of equity. The company has EBIT of $131 million and faces a corporate tax rate of 36%. The company’s bonds are rated BBB, and the cost of debt is 8%. At this rating the company has a probability of default of 2.30%, and the cost of bankruptcy is estimated to be 30% of firm value.

Estimate the unlevered value of the firm.

Estimate the levered value of the firm using the APV approach, at a debt ratio of 50%. At that debt ratio, the firm’s bond rating will be CCC, and the probability of default will increase to 30%.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91610610

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