A full equity firm has 5,000 shares outstanding worth $7 each. They are planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest and using the proceeds to buy up stock. The effective tax rate is 25%. What is the change in the share price if they make the debt for equity exchange?

A full equity firm has 5,000 shares outstanding worth $7 each. They are planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest and using the proceeds to buy up stock. The effective tax rate is 25%. What is the change in the share price if they make the debt for equity exchange?

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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A firm has preferred stock that pays an 10 percent dividend on a $75 par value. If a new issue is offered, flotation costs will be 3 percent of the current market price of $80. The firm's marginal tax rate is 35 percent. What is the firm's cost of preferred stock financing?
Abercrombie & Fitch's common stock pays a dividend of $0.75. It is currently selling for $35.91. If the firm's investors require a return of 15 percent on their investment from buying Abercrombie & Fitch stock, what growth rate would Abercrombie & Fitch have to provide the investors?
NoGrowth Corporation currently pays a dividend of $0.45 per quarter, and it will continue to pay this dividend forever. What is the price per share of NoGrowth stock if the firm's equity cost of capital is 17.49% ?
Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase.
Cliff Corp (CC) has assets of $300 million including $25 million in cash. CC has 1 million share of stock outstanding and $70 million of debt. Assume capital markets are perfect. What is CC’s current debt-to-equity ratio? What is CC’s current stock price? If CC distributes $18 million in dividends, then what is the new ex- dividend share price? If instead of paying the dividend CC repurchases $18 million of stock, then what will be the new share price? What is the new debt-to-equity ratio after the payout?
Jiffy Wax Corp. can sell common stock for $ 15 per share and its investors require a 14% return. However, the administrative or flotation costs associated with selling the stock amount to $ 2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling common stock? Select one: a. 14.00% b. 21.50% C 30.00% d. 16.67%
ABC Corporation will be investing in X Corporation shares. X provided dividends of 45 per share last year. ABC requires a return of 15% but expects X to have an equity growth rate of 9%. If ABC paid 800 for each share of X, how much did ABC over/under pay?
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n Tina Black's Fabrics is currently an all equity firm that has 15,000 shares of stock outstanding at a market price of $12.50 a share. Company management has decided to issue $60,000 worth of debt and use the funds to repurchase shares of the outstanding stock at the market price. The interest rate on the debt will be 7%. Ignoring taxes, what is the earnings per share (EPS) at the break-even level of earnings before interest and taxes (EBIT)? O A. O B. O D. $1.143 O C. $1.500 SOE. $1.125 $0.875 $0.667 27/
GN Bank just paid its investors a dividend of GH¢0.5. If the dividend will grow at 8% forever and the scounting rate is 15%, how much will you be willing to pay for GN shares today?
Rally inc, is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. Suppose Rally offers $3 per share, and shareholders tender their shares at this price. What will be Rally’s share price after the repurchase?

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