6. PPC Inc. has 3.0 million common shares oustanding, currently trading at an average price of $30 per share. The company has no debt, but it has determined that it could riase $15.0 million of long-term debt at a rate of 5% p.a. Consequently, the firm is considering a recapita- lization in which it would raise $15.0 million of debt and use the proceeds to buy back commor shares at their current market value. Its objective is to increase earnings per share (EPS). The company's annual earnings are expected to attain an average of about the levels shown below for the indefinite future if it DOES NOT complete the recapitalization (i.e., remains 1009 equity financed). Revenue 60,000,000 Operatinng expense 40,000,000 Operating income 20,000,000 Interest expense Net income before tax 20,000,000 Income tax @ 30% 6,000,000 Net income after tax 14,000,000 Based solely on the information provided here, answer the following: a. How many common shares will the company buy back if it completes the recapitalization? shares b. What is the firm's unleveraged cost of equity capital (Ru)? % c. What will be the firm's cost of equity capital (Re) if it completes the recapitalization?

6. PPC Inc. has 3.0 million common shares oustanding, currently trading at an average price of $30 per share. The company has no debt, but it has determined that it could riase $15.0 million of long-term debt at a rate of 5% p.a. Consequently, the firm is considering a recapita- lization in which it would raise $15.0 million of debt and use the proceeds to buy back commor shares at their current market value. Its objective is to increase earnings per share (EPS). The company's annual earnings are expected to attain an average of about the levels shown below for the indefinite future if it DOES NOT complete the recapitalization (i.e., remains 1009 equity financed). Revenue 60,000,000 Operatinng expense 40,000,000 Operating income 20,000,000 Interest expense Net income before tax 20,000,000 Income tax @ 30% 6,000,000 Net income after tax 14,000,000 Based solely on the information provided here, answer the following: a. How many common shares will the company buy back if it completes the recapitalization? shares b. What is the firm's unleveraged cost of equity capital (Ru)? % c. What will be the firm's cost of equity capital (Re) if it completes the recapitalization?

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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DFS Corporation is currently an all-equity firm, with assets with a market value of $ 163 million and 5 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permanent debt (i.e., the outstanding principal will remain constant) and use the proceeds to repurchase shares. DFS pays a 21 % corporate tax rate, so one motivation for taking on the debt is to reduce the firm's tax liability. However, the upfront investment banking fees associated with the recapitalization will be 6 % of the amount of debt raised. Adding leverage will also create the possibility of future financial distress or agency costs; shown in the table here, are DFS's estimates for different levels of debt. a. Based on this information, which level of debt is the best choice for DFS? b. Estimate the stock price once this transaction is announced. 9 Debt amount ($ million) 0 10 20 30 40 50 Present value of expected distress and…
TT Industries is trading for $20 per share and has 25 million shares outstanding. TT Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten-year maturity and a yield to maturity of 8%. Which of the following best describes TT's debt using a put option? A) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $200 strike price B) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $700 strike price C) Long $200 million in risk-free debt and Short a put option on the firm's assets with a $200 strike price D) Short $200 million in risk-free debt and Long a put option on the firm's assets with a $700 strike price
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