Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 21 5 pts Assume that your company has $40.0 million of debt at an 8.0 percent before-tax interest rate, and has 4,000,000 shares outstanding.

image text in transcribed

Question 21 5 pts Assume that your company has $40.0 million of debt at an 8.0 percent before-tax interest rate, and has 4,000,000 shares outstanding. The company's EBIT is currently $20,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40 percent. The company is considering issuing $50.0 million worth of new bonds (at par) and using the proceeds for a stock repurchase (total book value of debt will go up to $90.0 million). The firm's cost of this new debt (the annual coupon rate) would be 10 percent. (Note: although the coupon rate on the old debt will remain at 8.0 percent, the new required rate of return will go up to 10.0 percent, and the market value of the old debt will decrease.] The risk-free rate in the economy is 4 percent, and the market risk premium is 10 percent. The company's beta is currently 1.20, but its investment bankers estimate that the company's beta would rise to 1.32 if it proceeds with the recapitalization. Given this information, determine the difference between the final stock prices if the market does not anticipate an increase in value versus if it does anticipate an increase in value. Answer to the nearest cent, with no punctuation. That is, $5.289 should be entered at 5.29

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Finance questions

Question

i need 5 0 7 . " "

Answered: 1 week ago

Question

4-35. The two reporters (ran after) every lead enthusiastically.

Answered: 1 week ago