Question
A company has no debt outstanding, and its financial position is given by the following data: Assets (market value=book value) $4,000,000 EBIT $666,666.67 Cost of
A company has no debt outstanding, and its financial position is given by the following data: Assets (market value=book value) $4,000,000 EBIT $666,666.67 Cost of equity, Rs 10% Stock price, P0 $20 Shares outstanding, n0 200,000 Tax rate, T (federal-plus-state) 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity Rs, will increase to 12 to reflect the increased risk. Bonds can be sold at a cost Rd of 8%. The company is no growth firm. Hence all its earnings are paid out as dividends. Earnings are expected to be constant over time.
10-What will be the value of the firm with the new capital structure of 40% debt?
a) $2,895,364.47
b) $3,876,369.58
c) $4,301,075.27
d) $4,385,964.91
e) $5,378,485.96
11- What is the price per share when the recapitalization is announced?
a) $19.14
b) $21.51
c) $20.36
d) $21.93
e) $22.59
12- What is the number of outstanding shares after the recapitalization?
a) 105,005
b) 120,000
c) 150,010
d) 130,005
e) 165,000
13- What is the new EPS after recapitalization?
a) $2.16
b) $2.37
c) $2.63
d) $2.96
e) $3.16
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started