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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Vijay
As CFO of the Magnificent Electronics Company (MEC), you are considering a recapitalization plan that would convert MEC from its current all-equity capital structure to one including substantial financial leverage. MEC now has 1,000,000 ordinary shares outstanding, which are selling for $30 each, and you expect the company’s EBIT to be $3,600,000 per year for the foreseeable future. The recapitalization proposal is to issue $15,000,000 worth of long-term debt at an interest rate of 6.0% and use the proceeds to repurchase 500,000 ordinary shares worth $15,000,000. Assuming there are no market frictions such as corporate or personal income taxes, calculate the earnings per share and expected return on equity for MEC shareholders under both the current all-equity capital structure and under the recapitalization plan.
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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?
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Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $12.68 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
Sunnyfax Publishing pays out all its earnings and has a share price of $37.00. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 14%. If the reinvestment does not affect Sunnyfax's equity cost of capital, what is the expected share price as a consequence of this decision? O $45.87 $40.14 $68.81 $57.34 Suppose a ten-year, $1,000 bond with an 8.6% coupon rate and semiannual coupons is trading for $1,035.39. What is the bond's yield to maturity (expressed as an APR with semiannual compounding)? 8.08% O4.04% O 5.36% O 10.72%

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