Problem 16-8 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) EBIT Cost of equity, rs Stock price, Po Shares outstanding, no Tax rate, T (federal-plus-state) The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 996, 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 $3,000,000 $500,000 10% $15 200,000 4090 a. What effect would this use of leverage have on the value of the firm? -Select I. Decreasing the financial leverage by adding debt results in an increase in the firm's value II. Decreasing the financial leverage by adding debt has no effect on the firm's value III. Decreasing the financial leverage by adding debt results in a decrease in the firm's value b. What would be the price of Rivoli's stock? Round your answer to the nearest cent. per share c. What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firmSelect- its EPS by $ Problem 16-8 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) EBIT Cost of equity, rs Stock price, Po Shares outstanding, no Tax rate, T (federal-plus-state) The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 996, 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 $3,000,000 $500,000 10% $15 200,000 4090 a. What effect would this use of leverage have on the value of the firm? -Select I. Decreasing the financial leverage by adding debt results in an increase in the firm's value II. Decreasing the financial leverage by adding debt has no effect on the firm's value III. Decreasing the financial leverage by adding debt results in a decrease in the firm's value b. What would be the price of Rivoli's stock? Round your answer to the nearest cent. per share c. What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firmSelect- its EPS by $
