Question
1. Suppose that the Matrix Corporation has $120 million of assets, all equity financed, and that the firm has 6 million shares of stock outstanding
1. Suppose that the Matrix Corporation has $120 million of assets, all equity financed, and that the firm has 6 million shares of stock outstanding valued at $20 per share. Now that management has identified investment opportunities requiring $60 million of NEW funds and it can be raised in one of the following 3 ways:
Strategy 1: Issue $60 million equity.
Strategy 2: Issue $30 million of equity and borrow $30 million with r = 8%.
Strategy 3: Borrow $60 million with r = 8%.
a) Suppose the firms rate of return is r = 15%, compute the earnings per share for the 3 financing strategies listed above.
b) Suppose the firms rate of return is r = 10%, compute the earnings per share for the 3 financing strategies.
c) Suppose the firms rate of return is r = 5%, compute the earnings per share for the 3 financing strategies.
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