Central Grocers Inc. produces annual cash flows of $175,000, which are expected to continue indefinitely. The company

Question:

Central Grocers Inc. produces annual cash flows of $175,000, which are expected to continue indefinitely. The company is financed entirely with equity capital at an annual cost of 12 percent. Management is considering borrowing $400,000 at an annual interest rate of 6 percent to repurchase $400,000 of the company's outstanding stock (You can assume that the debt will be outstanding into the indefinite future.). What is the total value of Central Grocers' stock before the stock repurchase? Under Modigliani and Miller's Proposition 1, what would be the value of the total claims on the company's assets after the stock repurchase? What will be the rate of return on required by investors after the repurchase?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...