Rally, Inc, is an all-equity firm with assets worth $55 billion and 11 billion shares outstanding Rally plans to borrow $14 billion and use funds to repurchase shares. Raity's corporate tax rate is 21% and Rally plans to keep its outstanding debt equal to $14 billion permanently a. Without the increase in leverage, what would be Rally's share price? b. Suppose Rally offers $5.14 per share to repurchase its shares. Would shareholders sell for this price? c. Suppose Rally offers $5.45 per share, and shareholders tender their shares at this price. What will be Rally's share price after the repurchase? d. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case? a. Without the increase in leverage, what would be Rally's share price? Without the increase in leverage, Rally's share price is $ (Round to the nearest cent.)

Rally, Inc, is an all-equity firm with assets worth $55 billion and 11 billion shares outstanding Rally plans to borrow $14 billion and use funds to repurchase shares. Raity's corporate tax rate is 21% and Rally plans to keep its outstanding debt equal to $14 billion permanently a. Without the increase in leverage, what would be Rally's share price? b. Suppose Rally offers $5.14 per share to repurchase its shares. Would shareholders sell for this price? c. Suppose Rally offers $5.45 per share, and shareholders tender their shares at this price. What will be Rally's share price after the repurchase? d. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case? a. Without the increase in leverage, what would be Rally's share price? Without the increase in leverage, Rally's share price is $ (Round to the nearest cent.)

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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Bha
X Corporation (an all-equity financed firm) is contemplating about changing its capital structure. It plans to have 35% debt in the proposed capital structure. Currently, there are 7600 shares outstanding and the price per share is $55. EBIT is expected to remain at $36,000 per year forever. The interest rate on new debt is 8%, and there are no taxes. Which capital structure should Mr. ABC, a shareholder of the firm, prefer? He owns 100 shares of X Corporation. Assume that dividend payout ratio is 100%.
GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm distributes all the net income to the equity holders. The firm is considering a leveraged recapitalization in which it would borrow $ 250,000 and repurchase existing shares. The firm's tax rate is 40%. The cost of debt is 7%. 1/ Calculate the value of the firm with leverage.
Manshukh
MNO Oil has assets with a market value of $600 million, $64 million of which are cash. It has debt of $250 million, and 20 million shares outstanding. Assume perfect capital markets. If MNO Oil distributes the $64 million as a dividend, then its stock price after the dividend will be closest to:
DFS Corporation is currently an all-equity firm, with assets with a market value of $ 163 million and 5 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permanent debt (i.e., the outstanding principal will remain constant) and use the proceeds to repurchase shares. DFS pays a 21 % corporate tax rate, so one motivation for taking on the debt is to reduce the firm's tax liability. However, the upfront investment banking fees associated with the recapitalization will be 6 % of the amount of debt raised. Adding leverage will also create the possibility of future financial distress or agency costs; shown in the table here, are DFS's estimates for different levels of debt. a. Based on this information, which level of debt is the best choice for DFS? b. Estimate the stock price once this transaction is announced. 9 Debt amount ($ million) 0 10 20 30 40 50 Present value of expected distress and…
a) Jetpack Ltd. has an all equity capital structure. It has total assets worth $10 million, 10,000 outstanding shares and an EBIT of $750,000. It is contemplating a move to incorporate debt to the tune of 25% of itsasset value and can arrange the borrowing at a 5% p.a. interest rate. Wendy, a shareholder in the company, has 700 shares.i) What is Wendy's current percentage return if Jetpack follows a 100% dividend pay-out policy and there are no taxes?ii) If Wendy prefers the company to remain all equity financed, show how she could unlever her position to maintain the same percentage return as she is earning currently?b) Companies X and Y both wish to raise $100 million 10-year loans. Company X wishes to borrow at a fixed rate of interest as it wants to have a certainty about its future interest liabilities, while company Y wishes to borrow at a floating rate because its treasurer believes that interest rates are likely to fall in the future. Company X has been offered a fixed interest…
An all-equity firm currently has 1,000,000 shares of stock outstanding and is considering borrowing $5,000,000 at 10% and buying back one-fourth of those shares. Assume a tax rate of 30% and EBIT is $ 1,500,000. Should this company undertake the capital restructuring and why?
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,640,000 debt (costing 8.4 percent, all of which is tax deductible) and 214,000 shares of stock selling at $12 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,640,000 by selling additional shares of stock. The firm’s tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS.
Kennedy Limited is an all-equity publicly listed firm with 600,000 shares currently on issue trading at $20 per share and is expected to generate $1,800,000 in EBIT p.a. in perpetuity. They are considering immediately repurchasing one third their equity at the current market price and replacing this with debt with an interest cost of 4% per annum. Assume that Kennedy Limited operate in a perfect capital market with no taxes, information costs, transaction costs etc. a) Demonstrate the impact of the change in capital structure on the (i) Net Income, (ii) ROE and (iii) ROA for Kennedy Limited. b) For what value of EBIT will ROE be unaffected by Kennedy Ltd’s decision to repurchase shares?
ABC is an unlevered firm with EBIT of $12,257 per year forever. Its unlevered cost of equity is 11%. It plans to borrow $36,348 perpetual debt at 6% to buy back shares. If the corporate tax is 26%, what is the firm value after the recapitalization?
An all-equity financed company currently has $300 million in excess cash. -200 million shares outstanding, market price of each share is $15 -Board has decided to pay out this excess cash as a one-time special dividend to shareholders. -Assuming perfect capital markets, calculate the company’s ex-dividend price per share

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