Pump Water is a firm that exists in a world of almost perfect capital markets, where the only imperfection is the presence of corporate taxes. There exists federal government bonds in this world that currently yield a rate of return of 4.5% per annum compounded annually for all maturities. Like all other firms in this world, Pump Water pays corporate taxes on its profits to this government at a marginal rate of 35.0%. After having recently completed a leveraged recapitalization where it converted from being an all-equity firm to one that is now 72.0% financed by debt, shares of Pump Water currently trade at a price of $48.25 each. The debt that was used to finance the leveraged recapitalization was issued at par and is expected to be a permanent part of the Pump Water's capital structure going forward (such that the company will only ever pay interest on this debt and never pay off the principal). Pump Water's annual operating income is expected to be constant for the foreseeable future. A) What was the price per share of Pump Water before its recent leveraged recapitalization? The price of Pump Water prior to its recent leveraged recapitalization was $ per share. (Round your answer to three decimal places)

Pump Water is a firm that exists in a world of almost perfect capital markets, where the only imperfection is the presence of corporate taxes. There exists federal government bonds in this world that currently yield a rate of return of 4.5% per annum compounded annually for all maturities. Like all other firms in this world, Pump Water pays corporate taxes on its profits to this government at a marginal rate of 35.0%. After having recently completed a leveraged recapitalization where it converted from being an all-equity firm to one that is now 72.0% financed by debt, shares of Pump Water currently trade at a price of $48.25 each. The debt that was used to finance the leveraged recapitalization was issued at par and is expected to be a permanent part of the Pump Water's capital structure going forward (such that the company will only ever pay interest on this debt and never pay off the principal). Pump Water's annual operating income is expected to be constant for the foreseeable future. A) What was the price per share of Pump Water before its recent leveraged recapitalization? The price of Pump Water prior to its recent leveraged recapitalization was $ per share. (Round your answer to three decimal places)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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