Pennewell Publishing Inc. (PP) is a zero growth company. Itcurrently has zero debt and its earnings before interest andtaxes (EBIT) are $80,000. PP's current cost of equity is 10%,and its tax rate is 40%. The firm has 10,000 shares ofcommon stock outstanding selling at a price per share of$48.00.Refer to Exhibit 16.1. Assume that PP is consideringchanging from its original capital structure to a new capitalstructure with 35% debt and 65% equity. This results in aweighted average cost of capital equal to 9.4% and a newvalue of operations of $510,638. Assume PP raises $178,723in new debt and purchases T-bills to hold until it makes thestock repurchase. What is the stock price per shareimmediately after issuing the debt but prior to therepurchase?A) $45.90B) $48.12C) $51.06(D) $53.33(E) $58.75

Capital structure refers to the mixture of the components of debt and equity capital which is used…

Answered: Pennewell Publishing Inc. (PP) is a…

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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The Rogers Company is currently in this situation: (1) EBIT = $4.7 million; (2) tax rate, T = 40%; (3) value of debt, D = $2 million; (4) rd = 10%; (5) rs = 15%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 18.5% and its interest rate on all debt will rise to 12% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will remain…
The Rogers Company is currently in this situation: (1) EBIT = $4.7 million; (2) tax rate, T = 40%; (3) value of debt, D = $2 million; (4) rd = 10%; (5) rs = 15%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. a) What is the total market value of the firm’s stock, S, and the firm’s total market value, V? b) What is the firm’s weighted average cost of capital? c) Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 18.5% and its interest rate on all debt will rise to 12% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will…
The Rogers Company is currently in this situation: (1) EBIT = $4.7 million; (2) tax rate, T = 40%; (3) value of debt, D = $2 million; (4) rd = 10%; (5) rs = 15%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. a) What is the total market value of the firm’s stock, S, and the firm’s total market value, V? b) What is the firm’s weighted average cost of capital? c) Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 18.5% and its interest rate on all debt will rise to 12% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will…
The Rogers Company is currently in this situation: (1) EBIT = $5.7 million; (2) tax rate, T = 35%; (3) value of debt, D = $2.5 million; (4) rd = 12%; (5) rs = 14%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. a. What is the firm’s weighted average cost of capital?b. Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 17.5% and its interest rate on all debt will rise to 13% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will remain outstanding after the repurchase?
The Rogers Company is currently in this situation: (1) EBIT = $5.7 million; (2) tax rate, T = 35%; (3) value of debt, D = $2.5 million; (4) rd = 12%; (5) rs = 14%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. a.Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 17.5% and its interest rate on all debt will rise to 13% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will remain outstanding after the repurchase?
Sunland Inc.’s common shares currently sell for $35 each. The firm’s management believes that its shares should really sell for $42 each. The firm just paid an annual dividend of $2 per share and management expects those dividends to increase by 5 percent per year forever (and this is common knowledge to the market). - What does management believe is the correct cost of common equity for the firm?
In an M&M world with taxes, Roll Inc. is an all equity firm with an unlevered return of 16%. The value of the unlevered firm is $9,375,000. There are 500,000 shares outstanding. They want to alter their capital structure by issuing $1,600,000 in debt that will be used to repurchase stock. The return on debt is 7%. Tax rate is 25%. a) Find the cost of equity after the capital structure change. b) How many shares can they repurchase?
Julie Smith, an analyst with ABC Company, has collected the following data about the firm: EBITDA = $3.5 million Tax rate=38% Debt outstanding = $2.5 million Cost of debt = 10.5% Cost of common equity = 14% Shares of stock outstanding = 800,000 BV of the stock per share = $12 The firm's product market is considered stable, and the firm expects no growth, and all earnings are paid out as dividends. Calculate the firm's earning per share, assuming depreciation & amortization costs of $500,000 per year
What is the value of equity and debt?
Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00. It has no debt and 25 million shares outstanding. Now suppose that BBB announces plans to increase its leverage by borrowing $250 million and using the proceeds to repurchase shares. Assuming perfect capital markets, what is the firm value for BBB after this announcement? Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes. What is the value of BBB after this announcement? Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBB's stock decreases to $8 per share following the announcement, then what is the present value of BBB's financial distress costs?
VanMannen Foundations, Inc. (VF)VanMannen Foundations, Inc. (VF) is a zero-growth company that currently has zero debt, and it has the data shown below. EBIT = $80,000 Growth = 0% Orig cost of equity, rs = 10.0% No. of shares = 10,000 Price per share = $60.00 Tax rate = 25% Refer to the data for VanMannen Foundations, Inc. (VF). Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, what would be VF's new WACC and its new value of operations? New interest rate = rd = 6.00% New cost of equity = rs = 10.75% New Debt/Value = wd = 20% New Equity/Value = ws = 80% Whic one is correct? WACC Value a. 10.10%…
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