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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7.
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