Nile com is an internet retail firm It is expected to generate earnings before interest and taxes (EBIT) every year (forever) of $10 Million, and 100 of its net income will be paid out each year to shareholders as dividends The firm has 2 Million shares outstanding and the expected return on Niles assets (r A ) is 12 5 Assume there are no taxes If the firm currently has no debt, what is Niles EPS What is the current value of a Nile share Niles CFO decides that the firm should issue $40 Million in riskless debt which will have an annual coupon rate (assume that interest is paid out once per year) of 6 and stay outstanding forever The proceeds of the debt issuance will be used to repurchase equity shares at the current market price What will be Niles new EPS after the debt issuance A Wall Street analyst has argued that since EPS (earnings per share) will increase after the debt is issued, the share price of Nile should go up to reflect this increased EPS Do you agree with this analyst

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Posted on Sep 19, 2024

Nile.com is an internet retail firm. It is expected to generate earnings before interest and taxes (EBIT) every year (forever) of $10 Million, and 100%

Nile.com is an internet retail firm. It is expected to generate earnings before interest and taxes (EBIT) every year (forever) of $10 Million, and 100% of its net income will be paid out each year to shareholders as dividends. The firm has 2 Million shares outstanding and the expected return on Niles assets (r_A) is 12.5%. Assume there are no taxes.

If the firm currently has no debt, what is Niles EPS? What is the current value of a Nile share?
Niles CFO decides that the firm should issue $40 Million in riskless debt which will have an annual coupon rate (assume that interest is paid out once per year) of 6% and stay outstanding forever. The proceeds of the debt issuance will be used to repurchase equity shares at the current market price. What will be Niles new EPS after the debt issuance?

A Wall Street analyst has argued that since EPS (earnings per share) will increase after the debt is issued, the share price of Nile should go up to reflect this increased EPS. Do you agree with this analyst?