Question
Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firms debtequity ratio is expected to
Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firms debtequity ratio is expected to rise from 40 percent to 50 percent. The firm currently has $3.2 million worth of debt outstanding. The cost of this debt is 7 percent per year. Locomotive expects to have an EBIT of $1.31 million per year in perpetuity. Locomotive pays no taxes. a. What is the market value of Locomotive Corporation before and after the repurchase announcement? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) Market value Before $ After $ b. What is the expected return on the firms equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Expected return % c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Expected return % d. What is the expected return on the firms equity after the announcement of the stock repurchase plan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Expected return %
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