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5. Calculate the number of shares to be repurchased under the optimal capital structure. O 27,557 O 55,624 O 22,443 30.460 O 19,540

5. Calculate the number of shares to be repurchased under the optimal capital structure. O 27,557 O 55,624 O 22,443 30.460 O 19,540

Essentials Of Investments
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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5. Calculate the number of shares to be repurchased under the optimal capital structure. 27,557 55,624 22,443 30,460 O 19,540
Transcribed Image Text:5. Calculate the number of shares to be repurchased under the optimal capital structure. 27,557 55,624 22,443 30,460 O 19,540
Assume you have just been hired as business manager of Sunbucks, a coffee shop located adjacent to campus. The firm is currently financed with 90% equity and 10% debt; it has 50,000 shares outstanding; and PO = $9.93 per share. The management group owns about 50 percent of the stock, and the stock is traded in the over-the-counter market. The company's EBIT was $100,000 last year, and since the university's enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital will be required, Sunbucks plans to pay out all earnings as dividends. You suggested to your new boss that the firm should engage in a capital restructure by issuing more debt and use the proceeds to repurchase stocks. Your boss encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: % Financed With Debt Rd 0% --- 10 9% 45 9.5% 60 14% Sunbucks is in the 30 percent state-plus-federal corporate tax bracket, its current beta is 1.5, the risk-free rate is 5 percent, and the market risk premium is 7 percent.
Transcribed Image Text:Assume you have just been hired as business manager of Sunbucks, a coffee shop located adjacent to campus. The firm is currently financed with 90% equity and 10% debt; it has 50,000 shares outstanding; and PO = $9.93 per share. The management group owns about 50 percent of the stock, and the stock is traded in the over-the-counter market. The company's EBIT was $100,000 last year, and since the university's enrollment is capped, EBIT is expected to remain constant (in real terms) over time. Since no expansion capital will be required, Sunbucks plans to pay out all earnings as dividends. You suggested to your new boss that the firm should engage in a capital restructure by issuing more debt and use the proceeds to repurchase stocks. Your boss encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: % Financed With Debt Rd 0% --- 10 9% 45 9.5% 60 14% Sunbucks is in the 30 percent state-plus-federal corporate tax bracket, its current beta is 1.5, the risk-free rate is 5 percent, and the market risk premium is 7 percent.
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