Hey tutor get correct answer the general accounting question Martin and Sons (M and S) currently is an all-equity firm with 80,000 shares of stockoutstanding at a market price of $25 a share. The company's earnings before interest andtaxes are $90,000. M and S have decided to add leverage to their financial operations byissuing $650,000 of debt with an 8% interest rate. This $650,000 will be used to repurchaseshares of stock. You own 2,000 shares of M and S stock. You also loan out funds at an 8% rateof interest. How many of your shares of stock in M and S must you sell to offset the leveragethat the firm is assuming? Assume that you loan out all of the funds you receive from the saleof your stock.A) 350 sharesB) 677 sharesC) 650 sharesD) 598 sharesE) 702 shares

Step 1: Define Offsetting Leverage EffectOffsetting the leverage effect means rolling over the…

Answered: Martin and Sons (M and S) currently is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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Bayani Bakerys most recent FCF was 48 million; the FCF is expected to grow at a constant rate of 6%. The firms 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 distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has 368 million in debt and 60 million in preferred stock. 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? How many shares will remain after the repurchase? e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?
Mercer Corp. is a equity firm with 10 million shares outstanding and $140 million worth of debt outstanding. Its current share price is $76. Mercer's equity cost of capital is 8.5%. Mercer has just announced that it will issue $361 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $221 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: use the market value balance sheet.) c. Suppose Mercer's existing debt was risk-free with a 4.42% expected return, and its new debt is risky with a 4.85%expected return. Estimate Mercer's equity cost of capital after the transaction.
Bonanza Billiard Games is an all-equity firm with 50 million shares outstanding, which are currently trading at $22 per share. Last month, Bonanza announced that it will change its capital structure by issuing $300 million in debt. The $200 million raised by this issue, plus another $200 million in cash that Bonanza already has, will be used to repurchase existing shares of stock. Assume that capital markets are perfect.• What is the market capitalization of the company before the transaction takes place?• What is the market capitalization of the company after the transaction takes place?
WorldTrans is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 25%. The company is considering issuing $3,000,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 1.05. However, the CFO believes the beta would rise to 1.25 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0= EPS/rs because EPS = DPS.) Group of answer choices $35.43 $33.20 $29.99 $31.92 $26.81
Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use the proceeds to buy back common stock.a. How is the market price of the stock affected by the announcement?b. How many shares can the company buy back with the $160 million of new debt that it issues?c. What is the market value of the firm (equity plus debt) after the change in capital structure?d. What is the debt ratio after the change in structure?e. Who (if anyone) gains or loses?
The Eagle Inc. has 40 million shares outstanding, which are trading at $20 per share. Eagle maintains a constant debt level of $100 million. Suppose Eagle announces a recapitalization: it will first issue additional $400 million of debt (all investors are aware of this debt issuance) and then use $300 million to repurchase shares. The remaining $100 million is kept on the balance sheet as cash (hint: so the cash will not generate interest income). After this recapitalization, the Eagle Inc. will maintain its debt level indefinitely. The tax rate is 35%, and the interest rate of Eagle’s debt is 6%. a. What is the value of Eagle’s equity after therecapitalization? The value of equity is b. What is the stock price after the announcement? How many shares will the firm repurchase? The stock price will be _______ after the announcement. The firm will repurchase_______ million shares. (Round to two decimal places.)
Cliff Corp. (CC) has an enterprise value (MV equity + debt – cash) of $330 million, $50 million in cash and $30 million in debt. CC has 10 million shares outstanding and is considering using its $50 million in cash to repurchase shares. What s CC’s share price prior to the prior to the repurchase? How many shares will CC repurchase? Suppose news is released that increases enterprise value to $350 million immediately after the repurchase, then what is CC’s new share price? If management knows about the news prior to the repurchase, should they repurchase before or after the news is released?
Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has RM2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS), and its tax rate is 40%. The company is considering issuing RM5,000,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 0.90. However, the CFO believes the beta would rise to 1.10 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0 = EPS/rs because EPS = DPS.)
Ayna Inc. is an all-equity firm with 400,000 shares outstanding. It has P3,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS), and its tax rate is 25%. The company is considering issuing P5,000,000 of 12.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 0.90. However, the CFO believes the beta would rise to 1.10 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Round final answer to the nearest centavo or two decimal places) (Hint: P0 = EPS/rs because EPS = DPS; Repurchased stocks = Bonds/Stock price)
Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a market price of $45 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 9.5 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes. $38,475 $40,516 $42,000 $44,141
Random Tools is currently an all-equity firm that has 7,200 shares of stock outstanding at a narket price of $41 per share. The firm has decided to leverage its operations by issuing $60,000 of debt at an interest rate of 7.6 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.
Rally inc is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. After the increase leverage but before the share repurchase, what is the value of the equity?

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