Question
A.Equity Inc. is currently an all-equity financed firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of
A.Equity Inc. is currently an all-equity financed firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of $30,000 and pays no taxes. The firm contemplates a restructuring that would issue $50,000 in 8 percent debt, which will be used to repurchase stock. Show the value of the firm, EPS, and rate of return on the equity before and after the proposed restructuring. What changed?
B.Equity Inc. is currently an all-equity financed firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of $30,000 and pays no taxes. The firm contemplates a restructuring that would issue $50,000 in 8 percent debt, which will be used to repurchase stock. Assuming that individuals have the same borrowing opportunities as corporations, explain how an investor can sythesize the leverage that is proposed by Equity Inc. Under these conditions, what is the value of restructuring to a firm?
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