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.
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.
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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Transcribed Image Text: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.
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