Company A pays out all available earnings as dividends. Company A is is entirely equity financed and is borrowing money to repurchase shares. Company A has 550,000 shares outstanding and Acme is expected to generate $2,500,000 in EBIT every year for the foreseeable future. Company A shareholders require an 8% return on investment. If Company A borrows money, it will have to pay a 4% interest annually on debt Company A wants to borrow money to repurchase shares such that Company A shareholders achieve a return on equity (ROE) of 15%. How much money does Acme need to borrow to repurchase shares?
Company A pays out all available earnings as dividends. Company A is is entirely equity financed and is borrowing money to repurchase shares. Company A has 550,000 shares outstanding and Acme is expected to generate $2,500,000 in EBIT every year for the foreseeable future. Company A shareholders require an 8% return on investment. If Company A borrows money, it will have to pay a 4% interest annually on debt Company A wants to borrow money to repurchase shares such that Company A shareholders achieve a return on equity (ROE) of 15%. How much money does Acme need to borrow to repurchase shares?
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 4P
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Question
Company A pays out all available earnings as dividends.
Company A is is entirely equity financed and is borrowing money to repurchase shares.
Company A has 550,000 shares outstanding and Acme is expected to generate $2,500,000 in EBIT every year for the foreseeable future.
Company A shareholders require an 8% return on investment .
If Company A borrows money, it will have to pay a 4% interest annually on debt
Company A wants to borrow money to repurchase shares such that Company A shareholders achieve a return on equity (ROE) of 15%.
How much money does Acme need to borrow to repurchase shares?
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