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Assume that your company is an EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company ays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends er share, and the company's tax rate is 40. e company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for tock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The -free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company' a is currently 1.10, but its investment bankers estimate that the company's beta would rise to Dif it proceeds with the recapitalization. me that the market does anticipate an increase in value when the firm announces that it will

Assume that your company is an EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company ays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends er share, and the company's tax rate is 40. e company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for tock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The -free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company' a is currently 1.10, but its investment bankers estimate that the company's beta would rise to Dif it proceeds with the recapitalization. me that the market does anticipate an increase in value when the firm announces that it will

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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Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40. The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company's beta is currently 1.10, but its investment bankers estimate that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Assume that the market does anticipate an increase in value when the firm announces that it will recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase equilibrium price per share. Given this information, determine what the earnings per share will be after the recapitalization is completed. O $6.46 O $7.62 O $6.61 O $7.06 O $6.76
Transcribed Image Text:Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40. The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company's beta is currently 1.10, but its investment bankers estimate that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Assume that the market does anticipate an increase in value when the firm announces that it will recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase equilibrium price per share. Given this information, determine what the earnings per share will be after the recapitalization is completed. O $6.46 O $7.62 O $6.61 O $7.06 O $6.76
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