Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that your company is an all-equity firm with 5,000,000 shares outstanding. The company's EBIT is currently $20,000,000, and EBIT is expected to remain

image text in transcribed

Assume that your company is an all-equity firm with 5,000,000 shares outstanding. The company's EBIT is currently $20,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year; its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40. The company is considering issuing $22.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 10 percent. The company's beta is currently 1.20, but its investment bankers estimate that the company's beta would rise to 1.30 if it proceeds with the recapitalization. Given this information, determine the difference between the final stock prices if the market does anticipate an increase in value versus it does not anticipate an increase in value. Enter your answer in dollars and cents, with no punctuation. For example, if you answer is $8.90, enter "8.90".

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Core Concepts

Authors: Raymond M Brooks

2nd edition

132671034, 978-0132671033

More Books

Students also viewed these Finance questions