Assume that your company is an all-equity firm with 250,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share are equal to its dividends per share and this is currently $6.00 per share. The company's tax rate is 40 percent, its current cost of stock, Ks, is 8 percent, and its current stock price is $75 per share. Now assume that the company is considering issuing $3.75 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 5 percent or interest of $187,500. The risk-free rate in the economy is 4 percent, and the market risk premium is 5 percent. The company's beta is currently 0.8, but its investment bankers estimate that the company's beta would rise to 0.9 if it proceeds with the recapitalization. Assume that the shares are repurchased at the equilibrium price that will prevail after the recapitalization (that is, the market does anticipate a change in price). Given this information, determine the price of the company's stock after the recapitalization has been completed. $81.62 $78.81 $80.29 $83.08 $76.43
Assume that your company is an all-equity firm with 250,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share are equal to its dividends per share and this is currently $6.00 per share. The company's tax rate is 40 percent, its current cost of stock, Ks, is 8 percent, and its current stock price is $75 per share. Now assume that the company is considering issuing $3.75 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity of 5 percent or interest of $187,500. The risk-free rate in the economy is 4 percent, and the market risk premium is 5 percent. The company's beta is currently 0.8, but its investment bankers estimate that the company's beta would rise to 0.9 if it proceeds with the recapitalization. Assume that the shares are repurchased at the equilibrium price that will prevail after the recapitalization (that is, the market does anticipate a change in price). Given this information, determine the price of the company's stock after the recapitalization has been completed. $81.62 $78.81 $80.29 $83.08 $76.43
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:Assume that your company is an all-equity firm with 250,000 shares outstanding. The company's
EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of
its earnings each year, so its earnings per share are equal to its dividends per share and this is
currently $6.00 per share. The company's tax rate is 40 percent, its current cost of stock, Ks, is 8
percent, and its current stock price is $75 per share.
Now assume that the company is considering issuing $3.75 million worth of bonds (at par) and using
the proceeds for a stock repurchase. If issued, the bonds would have an estimated yield to maturity
of 5 percent or interest of $187,500. The risk-free rate in the economy is 4 percent, and the market
risk premium is 5 percent. The company's beta is currently 0.8, but its investment bankers estimate
that the company's beta would rise to 0.9 if it proceeds with the recapitalization.
Assume that the shares are repurchased at the equilibrium price that will prevail after the
recapitalization (that is, the market does anticipate a change in price). Given this information,
determine the price of the company's stock after the recapitalization has been completed.
$81.62
$78.81
$80.29
$83.08
$76.43
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