13. Texas Inc. is all equity financed and uses common shares to finance its investments and operations. Texas Inc.'s 250,000 common shares are currently trading at a price of $45 each. The company's average tax rate is 35%. Ignoring distress costs, determine the price per share of Texas Inc. If Texas issues 1,000 bonds at a price of $900 each ($900,000 debt) in order to repurchase a proportion of its shares. Texas Inc.'s debt level is fixed in perpetuity and the risk of tax shields is the same as the risk of debt.

13. Texas Inc. is all equity financed and uses common shares to finance its investments and operations. Texas Inc.'s 250,000 common shares are currently trading at a price of $45 each. The company's average tax rate is 35%. Ignoring distress costs, determine the price per share of Texas Inc. If Texas issues 1,000 bonds at a price of $900 each ($900,000 debt) in order to repurchase a proportion of its shares. Texas Inc.'s debt level is fixed in perpetuity and the risk of tax shields is the same as the risk of debt.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Big Co. would like to buy Small Co. for a 30% control premium. Currently Big Co.’s stock price is $28.32, its EPS is $2.48 and it has 103mm shares outstanding. Currently Small Co.’s stock price is $24.59 (before premium), its EPS is $1.78 and it has 21.5mm shares outstanding. Big Co.’s cost of debt is 5% and its tax rate is 40%. If Big Co. uses stock to acquire Small Co., what amount of pre-tax synergies are required for Big Co. to breakeven on an EPS basis? If Big Co. uses debt to acquire Small Co. what would Big Co.'s proforma EPS be?
An investment bank agrees to underwrite an issue of 15 million shares of stock for Looney Landscaping Corporation. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $10.00 per share to Looney Landscaping Corporation for the 15 million shares of stock. The investment bank then sells those shares to the public for $11.50 per share. How much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? If the investment bank can sell the shares for only $8.50, how much money does Looney Landscaping Corporation receive? What is the profit to the investment bank? b. Suppose, instead, that the investment bank agrees to underwrite the 15 million shares on a best efforts basis. The investment bank is able to sell 13.5 million shares for $10.00 per share, and it charges Looney Landscaping Corporation $0.325 per share sold. How much money does Looney Landscaping Corporation receive? What is the profit to the investment…
a. Richard owns $33,000 worth of XYZ's stock. What rate of return is he expecting? Rate of return b. Calculate the cash flows and rate of return by investing in ABC, and using homemade leverage, how Richard could generate exactly the same? Total cash flow Rate of return ABC XYZ % c. What is the cost of equity for ABC? What is it for XYZ? Cost of equity ABC XYZ $ d. What is the WACC for ABC? For XYZ? WACC %
Jerry Jeff, Inc. has 14,900 shares of common stock outstanding at a price per share of $77 and the rate of return on the stock is 11.69 percent. The value of Jerry Jeff's debt is $586,800 and the required rate of return on the debt is 6.17 percent. What is the Jerry Jeff's WACC if the tax rate is 21 percent? Multiple Choice 9.82% 8.53% 8.70% 9.38%
XYZ Banks Inc. is a short-term lender. XYZ is all equity financed. XYZ has 20 million shares outstanding which trade for P7 per share. XYZ's shareholders require a return of 9%. Cash-Mart Financial is also a short-term lender. It's shares are trading for P15 per share. Cash-Mart has 10 million shares outstanding. Cash-Mart's corporate bonds are rated BB and are trading for 87.5% of face value to yield 7%. The face value of Cash-Mart's debt is P100 million. What is the required return of Cash-Mart's shareholders? (Assume that the tax rate is 0%.)
Charter Corp. has issued 1,554 debentures with a total principal value of $1,554,000. The bonds have a coupon interest rate of 9%. a. What dollar amount of interest per bond can an investor expect to receive each year from Charter? b. What is Charter's total interest expense per year associated with this bond issue? c. Assuming that Charter is in a 39% corporate tax bracket, what is the company's net after-tax interest cost associated with this bond issue?
Generous Corporation has a cost of equity of 10.8 percent, the YTM on the company's bonds is 6.3 percent, and the tax rate is 35 percent. The company's bonds sell for 103.6 percent of par. The debt has a book value of $420,000 and total assets have a book value of $956,000. If the market-to-book ratio of equity is 2.86 times, what is the company's WACC? 8.90% 780% 9.32% 792%
Cede & Co can borrow at 11 percent. Cede currently has no debt, and the cost of equity is 12 percent. The current value of the firm is $664,000. The corporate tax rate is 30 percent. Required: What will the value be if Cede borrows $223,000 and uses the proceeds to repurchase shares?
Carla Vista Inc. is considering two alternatives to finance its construction of a new $1.40 million plant. (a) Issuance of 140,000 shares of common stock at the market price of $10 per share. (b) Issuance of $1,400,000, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (40%) Net income Outstanding shares Earnings per share $ Indicate which alternative is preferable. Issue Stock $600,000 Net income is because of the additional shares of stock that are outstanding. $ V if stock is used. However, earnings per share is Issue Bond $600,000 460,000 V than earnings per share if bonds are used
Cooley Corporation has $20,000 that it plans to invest in marketable securities. It is choosing between MCI bonds which yield 10 percent, state of Colorado municipal bonds which yield 7 percent, and MCI preferred stock with a dividend yield of 8 percent. Cooley's corporate tax rate is 40 percent, and 70 percent of its dividends received are tax exempt. What is the after-tax rate of return on the highest yielding security? A. a. 7.04% B. b. 7.0% C. c. 8.43% D. d. 6.9% E. e. 6.0%
Henriksen Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 10% (issued at face amount) $2,500,000 Preferred $1 stock, $10 par 2,500,000 Common stock, $25 par 2,500,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $1,050,000, (b) $1,300,000, and (c) $1,550,000.
Farmington Company can borrow at 7.05 percent. The company currently has no debt and the cost of equity is 11.45 percent. The current value of the firm is $660,000. The corporate tax rate is 23 percent. What will the value be if the company borrows $375,000 and uses the proceeds to repurchase shares?

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