3. Leverage and Earnings. River Cruises (see Section 16.1) is all-equity-financed. Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Rework Table 16.3 by selecting values for (a) to (j) below to show how earnings per share and share return vary with operating income after the financing. (LO16-1) Current Data Number of shares 100,000 Price per share $10 Market value of shares $1 million Outcomes State of the Economy Slump Normal Вoom Profits before interest $75,000 $125,000 $175,000 Interest (a) (a) (a) Equity earnings (b) (c) (d) Earnings per share (e) (g) Return on shares (h) () Expected outcome :::
3. Leverage and Earnings. River Cruises (see Section 16.1) is all-equity-financed. Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Rework Table 16.3 by selecting values for (a) to (j) below to show how earnings per share and share return vary with operating income after the financing. (LO16-1) Current Data Number of shares 100,000 Price per share $10 Market value of shares $1 million Outcomes State of the Economy Slump Normal Вoom Profits before interest $75,000 $125,000 $175,000 Interest (a) (a) (a) Equity earnings (b) (c) (d) Earnings per share (e) (g) Return on shares (h) () Expected outcome :::
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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Transcribed Image Text:3. Leverage and Earnings. River Cruises (see Section 16.1) is all-equity-financed. Suppose it now
issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000
shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value.
Rework Table 16.3 by selecting values for (a) to (j) below to show how earnings per share and
share return vary with operating income after the financing. (LO16-1)
Current Data
Number of shares
100,000
Price per share
$10
$1 million
Market value of shares
Outcomes
State of the Economy
Slump
Normal
Boom
Profits before interest
$75,000
$125,000
$175,000
Interest
(a)
(a)
(a)
Equity earnings
(b)
(c)
(d)
Earnings per share
(e)
(g)
Return on shares
(h)
(1)
Expected outcome
:::
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