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

question 27

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:

Dividend Increase

A company's action to raise the amount of money paid to shareholders out of its profits on a per-share basis.

Required Return

The minimal yearly percentage increase essential to entice investment by individuals or companies into a certain project or security.

Per Share Dividend

The amount of dividend that is paid out for each share of a company's stock.

Dividend Increase

A rise in the amount of money paid to shareholders out of a company's earnings per share.