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Corporate Fin Focused Approach

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 8P

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Charleston Mills is an all-equity firm with a total
market value of $221,000. The firm has 8,000
shares of stock outstanding. Management is
considering issuing $50,000 of debt at an
interest rate of 7 percent and using the
proceeds on a stock repurchase. Ignore taxes.
How many shares can the firm repurchase if it
issues the debt securities?

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River Cruises is all-equity-financed. Number of shares Price per share Market value of shares Profits before interest Number of shares Price per share Market value of shares Market value of debt Profits before interest Interest Equity earnings Earnings per share Return on shares $ Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. Note: Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places. $ Outcomes Current Data 100,000 $ 10 $ 1,000,000 Data Slump 10 Outcomes Slump $ 80,500 80,500 State of the Economy Normal $ 136,000 State of the Economy Normal % $ 136,000 % Expected Outcome Boom $ 197,500 $ Boom 197,500 %

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