Question
Q-1:Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely
Q-1:Based on the analysis in case Exhibit 9, what is the anticipated CPK share price under each scenario? How many shares will CPK be likely to repurchase under each scenario? What role does the tax deductibility of interest play in encouraging debt financing at CPK?
Q-2:What capital structure policy would you recommend for CPK, and why? Please justify your recommendation.
Note: Based on following data how I can come up with the solutions. Two questions were mentioned above.
| Exhibit 9 | Debt/Total Capital | ||||||
|---|---|---|---|---|---|---|---|
| Actual | 10% | 20% | 30% | ||||
| ROE | 8.99% | 9.52% | 10.19% | 11.05% | |||
| Cost of Debt (rd) | 6.16% | 0.0616 | 0.0616 | 0.0616 | Page 1 of 1 | 41 | |
| Market Value Weights of | Page 1 of 1 | 41 | |||||
| Debt | 0.00% | 3.47% | 6.86% | 10.18% | Page 1 of 1 | 41 | |
| Equity | 100.00% | 96.53% | 93.14% | 89.82% | Page 1 of 1 | 41 | |
| Levered Beta | 85.00% | 87.06% | 89.23% | 91.50% | Page 1 of 1 | 41 | |
| Risk-Free Rate | 5.25% | 0.0525 | 0.0525 | 0.0525 | Page 1 of 1 | 41 | |
| Market Premium | 5.00% | 0.05 | 0.05 | 0.05 | Page 1 of 1 | 41 | |
| Cost of Equity (re) | 9.50% | 9.60% | 9.71% | 9.83% | Page 1 of 1 | 41 | |
| WACC | 9.50% | 9.41% | 9.33% | 9.25% | Page 1 of 1 | 41 | |
| Page 1 of 1 | 41 | ||||||
| Page 1 of 1 | 41 | ||||||
| Page 1 of 1 | 41 | ||||||
| Current Share Price | 22.10 | 22.1 | 22.1 | 22.1 | Page 1 of 1 | 41 | |
| Current Outstanding Shares | 29130000.00 | 29130000 | 29130000 | 29130000 | Page 1 of 1 | 41 | |
| Present Value for Tax Savings | 0 | 7341425 | 14682850 | 22023950 | Page 1 of 1 | 41 | |
| Tax Savings for each stock | 0.00% | 7341425 | 14682850 | 22023950 | Page 1 of 1 | 41 | |
| New Share Price | 22.10 | 22.35 | 22.60 | 22.86 | |||
| Number of Shares Repurchased | 0.00 | 1010602.05 | 1998668.76 | 2964903.31 | |||
| New Outstanding Shares | 29130000.00 | 28119397.95 | 27131331.24 | 26165096.69 | |||
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Finance Plain And Simple
Authors: Sebastian Nokes
1st Edition
0273731297, 978-0273731290
