Simpson Department Store Simpson Department Stores Operates Retail Department Store Chains Throughout the Chains

question 13

Essay

Simpson Department Store
Simpson Department Stores operates retail department store chains throughout the United States. At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million. The market value of its common stock is $6,895, and its market equity beta is 0.79. An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent.
Regarding the equity buyout, compute the unlevered market equity (asset) beta of Simpson before consideration of the LBO. Assume that the book value of the debt equals its market value. The income  tax rate is 35 percent.

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Definitions:

Disclosure

The act of making new or important information known, especially about financial operations or conditions.

AASB 114

Australian Accounting Standards Board ruling 114, which sets guidelines for segment reporting by financial entities.

AASB 8/IFRS 8

Operating Segments, a standard that requires entities to disclose information about their operating segments, products, services, and geographical areas.

Disclosure Requirements

Rules and regulations that mandate the release of all relevant financial information that could influence the decision-making process of investors, stakeholders, and the public.