Capital Structure Analysis The Rivoli Company has no debt outstanding, and its financial position is given by
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Question:
Capital Structure Analysis
The Rivoli Company has no debt outstanding, and its financial position is given by the following data:
Assets (Market value = book value) | $3,000,000 |
EBIT | $500,000 |
Cost of equity, rs | 10% |
Stock price, Po | $15 |
Shares outstanding, no | 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 35% debt based on market values, its cost of equity, rs, will increase to 13% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. Do not round intermediate calculations, except, number of shares which should be rounded to nearest whole number.
- What would be the price of Rivoli's stock? Round your answer to the nearest cent. $per share
- What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent.The firm-Select-increaseddecreasedits EPS by $.
- The $500,000 EBIT given previously is actually the expected value from the following probability distribution:
Probability EBIT 0.10 - $ 100,000 0.20 150,000 0.40 450,000 0.20 850,000 0.10 1,300,000 Probability TIE 0.10 0.20 0.40 0.20 0.10
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