Bayani Bakery's most recent FCF was $48 million; the FCF is expected to grow at a constantrate of 6%. The firm's WACC is 12%, and it has 15 million shares of common stock outstanding.The firm has $30 million in short-term investments, which it plans to liquidate and distributeto common shareholders via a stock repurchase; the firm has no other nonoperating assets.It has $428 million in debt.(a) What is the value of operations?(b) Immediately prior to the repurchase, what is the intrinsic value of equity?(c) Immediately prior to the repurchase, what is the intrinsic stock price?(d) How many shares will be repurchased?(e) How many shares will remain after the repurchase?(f) Immediately after the repurchase, what is the intrinsic value of equity?(g) Immediately after the repurchase, what is the intrinsic stock price?

Free cash flows are the cash flows which are available to be distributed to shareholders. This is…

Answered: Bayani Bakery's most recent FCF was $48…

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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You have been asked to estimate the cost of capital for ABC Corporation. The companyhas 10 million shares and 200,000 bonds outstanding at par value $15,000. In addition, it has$500 million in short-term debt from bank. The target capital structure ratio is 70 percentequity, 20 percent long-term debt, and 10 percent short-term debt.The current capital structure has temporarily moved slightly away from the target ratio. Thecompany’s shares currently trade at $50 with a beta of 1.30. The book value of the shares is$45. The annual coupon rate of the bonds is 10 percent, they trade at 105 percent of par, andthey will mature in seven years. Interest on the short-term debt is 10 percent. The currentyield on ten-year government bonds is 7 percent. The market risk is 15 percent. The corporatetax rate applicable is expected to be 25 percent. What would be the appropriate cost of capital for the ABC Corporation? Explain!
XYZ Banks Inc. is a short-term lender. XYZ is all equity financed. XYZ has 20 million shares outstanding which trade for P7 per share. XYZ's shareholders require a return of 9%. Cash-Mart Financial is also a short-term lender. It's shares are trading for P15 per share. Cash-Mart has 10 million shares outstanding. Cash-Mart's corporate bonds are rated BB and are trading for 87.5% of face value to yield 7%. The face value of Cash-Mart's debt is P100 million. What is the required return of Cash-Mart's shareholders? (Assume that the tax rate is 0%.)
Supercool Inc is currently an unlevered firm with 1,000 outstanding shares. It expects togenerate $1,600 in EBIT in perpetuity. The tax rate is 35%. All earnings after tax are paid outas dividends. The firm is considering a capital restructuring for which the company will issue$3,000 of debt to buy back shares. Its cost of debt is 10%. Unlevered firms in the sameindustry have a cost of equity of 20%. The capital restructuring is going to take place onemonth after its announcement. What is the share price of Supercool on the day before andafter the restructuring completion?
Kinston Enterprises has a debt obligation of $47 million that is due now. The market value of Kinston's assets is $102 million, and the firm has no other liabilities. Assume that capital markets are perfect and that Kinston has 5 million shares outstanding. If Kinston decides to sell new shares to raise capital to pay its debt obligation, how many shares will be issued? 5.0 million 4.3 million 4.7 million 4.0 million
Northern Wood Products is an all-equity firm with 20,700 shares of stock outstanding and a total market value of $365,000. Based on its current capital structure, the firm is expected to have earnings before interest and taxes of $32,500 if the economy is normal, $19,200 if the economy is in a recession, and $45,800 if the economy booms. Ignore taxes. Management is considering issuing $91,900 of debt with an interest rate of 7 percent. If the firm issues the debt, the proceeds will be used to repurchase stock. What will the earnings per share be if the debt is issued and the economy is in a recession?
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $12.68 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
Gentrix Inc. has two major sources of financing—common stock and long-term debt. They currently have 1,000,000 shares of stock outstanding, which are trading at a price of $20 per share. Two years ago, they issued $5,000,000 of 20-year debt to the general public at par value. The debt pays an annual coupon of 7%. The coupon is paid annually. Given their current capital structure, Gentrix has estimated that their cost of equity is 15%. Gentrix faces a marginal tax rate of 40%. It has been exactly two years since Gentrix issued their debt, and interest rates have increased. If the long-term debt is currently having a yield to maturity of 9%, what is the current value of the outstanding debt? Is it selling at a premium or discount to par value? (Remember that coupon payments of 7% are made annually rather than the semiannually.) Based on Gentrix’s current capital structure, what is the firm’s weighted average cost of capital? Assume that Gentrix currently has a capital structure that is…
Kaur Resources is an unlevered firm with a total market value of $460,000 and 10, 000 shares of stock outstanding. The firm has expected EBIT of $22, 000 if the economy is normal and $35, 000 if the economy booms. The firm is considering a bond issue of $73, 600 with an attached interest rate of 6.8 percent. The bond proceeds will be used to repurchase shares. The tax rate is 21 percent. What will be the earnings per share after the repurchase if the economy is normal? Multiple Choice $2.02 $1.70 $1.60 $2.62 $1.34
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. AJC's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization? ⒸA. 5,250 OB. 4,250 OC. 4,450 OD. 4,750
The W.C. Pruett Corp. has $800,000 of interest-bearing debt outstanding, and it pays an annual interest rate of 12%. In addition, it has $700,000 of common equity on its balance sheet. It finances with only debt and common equity, so it has no preferred stock. Its annual sales are $4.8 million, its average tax rate is 25%, and its profit margin is 2%. What are its TIE ratio and its return on invested capital (ROIC)? Round your answers to two decimal places. TIE: ROIC: X %
Edelman Engines has $13 billion in total assets- of which cash and equivalents total $100 million. Its balance sheet shows $2.6 billion in current liabilities- of which the notes payable balance totals $1.03 billion. The firm also has $6.5 billion in long-term debt and $3.9 billion in common equity. It has 300 million shares of common stock outstanding, and its stock price is $25 per share. The firm's EBITDA totals $1.05 billion. Assume the firm's debt is priced at par, so the market value of its debt equals its book value. What are Edelman's market/book and its EV/EBITDA ratios? Do not round intermediate calculations. Round your answers to two decimal places. M/B: EV/EBITDA:
Special Engineering Plastics carries no debt on its books. It has $100 million long term financing consisting entirely of equity. The firm wishes to raise another $50 million for expansion through one of the two choices, (a), it can raise all additional funds by selling ordinary shares at $50 per share, and, (b) it can raise additional funds by selling debt at 12% pa interest. The firm has earnings before interest and taxes of $15 million that are expected to rise to $27 million with expansion. The firm’s tax rate is 40% and 2,000,000 ordinary shares are presently outstanding. Find out EPS under each option. The firm has made further calculations. It finds that with equity financing, EPS falls to zero at EBIT = 0 and that for debt financing, EPS falls to zero with EBIT = $6,000,000. Draw an EBIT-EPS chart and interpret it.

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