CorVIR Inc. is a firm whose operations generate an expected EBIT (earnings before interest income,...
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CorVIR Inc. is a firm whose operations generate an expected EBIT (earnings before interest income, interest expenses and corporate taxes) of $80 per year in perpetuity. These are all the cash-flows that the firms operating assets are generating, and the company is currently allequity financed. Given the risk of CorVIRs operations, the market requires a return of 15%, i.e., the unlevered cost of capital is 15% for these cash-flows. In addition to its operating assets, CorVIR holds $150 of excess cash on its balance sheet, which is invested in Treasury-bills generating a risk-free return of 4% every year before corporate taxes. The corporate tax rate is 40%. CorVIR is listed on a stock exchange and has 1,000 shares outstanding. i. Assume the market believes that CorVIR will keep the $150 of cash on its balance sheet forever and never take on any debt. What is the market value of CorVIRs equity and the price of CorVIRs stock? (Hint: Excess cash invested in treasury is similar to carrying negative debt and therefore features tax disadvantage that is opposite to the usual interest tax shield)
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