Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to leveraged capital structure. The proposal is for Focus to sell $52,000,000 worth of long-term debt at an interest rate of 7.25% and then repurchase as many shares as possible at a price of $29 per share. Focus currently has 5,200,000 shares outstanding and expects EBIT to be $27,000,000 per year in perpetuity. Ignoring taxes, calculate the following: a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization. b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures. c. The EBIT where EPS is the same for both capital structures.

Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to leveraged capital structure. The proposal is for Focus to sell $52,000,000 worth of long-term debt at an interest rate of 7.25% and then repurchase as many shares as possible at a price of $29 per share. Focus currently has 5,200,000 shares outstanding and expects EBIT to be $27,000,000 per year in perpetuity. Ignoring taxes, calculate the following: a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization. b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures. c. The EBIT where EPS is the same for both capital structures.

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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Lancaster Engineering Inc (LEI) has the following capital structure, which it considers to be optimal. Long Term Debt 30% Preferred Stock 10% Common Stock 60% Total 100% LEI can obtain capital in the following ways: New Preferred Stock with a dividend of $12 can be sold at $97 to the public; however LEI will incur $2 of flotation costs for each share it sells. Debt can be sold at a pre-tax cost of 12%. LEIâs tax rate is 40%. (Note that 12% is the pre-tax cost; all costs must be expressed on an after-tax basis so as to be comparable.) LEI can sell its common stock for $55. However they expect underwriting fees to be $3 per share and an additional $2 per share in other flotation costs. They expect to pay a dividend on the common stock next year of $3.50 and it is expected that dividends will continue to grow at the historical rate of 8%. Required: Determine the cost of each capital component. Determine the weighted average cost of capital (WACC) for LEI.
Company A plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The required return on each component source of capital is given as follows: debt 8.00% and preferred stock 8.60%. Common stock is currently selling for $50 per share, and flotation costs for new common stock will amount to $5 per share. The expected dividend next year for this company is $2.50. Furthermore, dividends are expected to grow at a 6 percent rate far into the future. The corporate tax rate is 34 percent. What is the WACC of this company? A. 8.75% B. There is not enough information to answer this question. C. 9.84% D. 10.00%
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $20 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 40%. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000.$ Assuming there is sufficient…
Estimate a reasonable intrinsic stock price per share as of 01/01/2023 for private Manufacturing Company A given the information in the table below. Also assume that the company has a 10.50% weighted average cost of capital, $5,542 million excess cash holdings, $25,000 million market value of debt, 1,000 million shares outstanding, and 2.0% FCF terminal growth rate starting at the end of 2027. Assume that the cash flows depicted in the table below occur at the end of each year (i.e., -600 is FCF1 and 16,500 is FCF5).
Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to leveraged capital structure. The proposal is for Focus to sell $53,000,000 worth of long-term debt at an interest rate of 7% and then repurchase as many shares as possible at a price of $25 per share. Focus currently has 4,700,000 shares outstanding and expects EBIT to be $22,000,000 per year in perpetuity. Ignoring taxes, calculate the following: a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization. b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures. c. The EBIT where EPS is the same for both capital structures. d. The EBIT where EPS is zero for both capital structures. a. The number of shares outstanding for Focus if it adopts the proposed recapitalization is shares. (Round to the nearest whole…
Integrative-Optimal capital structure Medallion Cooling Systems, Inc., has total assets of $10,200,000, EBIT of $2,000,000, and preferred dividends of $197,000 and is taxed at a rate of 40%. In an effort to determine the optimal capital structure, the firm has assembled data on the cost of debt, the number of shares of common stock for various levels of indebtedness, and the overall required return on investment: Capital structure debt ratio 0% 15 30 45 60 Debt Ratio EBIT Less: Interest EBT Taxes @40% Net profit Less: Preferred dividends EPS Profits available to common stockholders # shares outstanding a. Calculate earnings per share for each level of indebtedness. b. Use the equation Po EPS/r, and the earnings per share calculated in part (a) to calculate a price per share for each level of indebtedness. c. Choose the optimal capital structure. Justify your choice. a. Calculate earnings per share for each level of indebtedness. Calculate the EPS below: (Round to the nearest dollar.…
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What is required return on Green's equity after the restructuring?
Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to leveraged capital structure. The proposal is for Focus to sell $49,000,000 worth of long-term debt at an interest rate of 7.75% and then repurchase as many shares as possible at a price of $22 per share. Focus currently has 4,900,000 shares outstanding and expects EBIT to be $25,000,000 per year in perpetuity. Ignoring taxes, calculate the following: a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization. b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures. c. The EBIT where EPS is the same for both capital structures. d. The EBIT where EPS is zero for both capital structures. a. The number of shares outstanding for Focus if it adopts the proposed recapitalization is The per-share price for Focus if it…
WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $10 million in new projects. The firm's present market value capital structure, here below, is considered to be optimal. There is no short-term debt. Debt Common equity Total capital $30,000,000 30,000,000 $60,000,000 New bonds will have a 6% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 25%. a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Round your answer to the nearest dollar. $ b. Assuming there is sufficient cash flow for Tysseland to maintain its target capital…
Free cash flow valuation Nabor Industries is considering going public but is unsure of a fair offering price for the company. Before hiring an investment banker to assist in making the public offering, managers at Nabor have decided to make their own estimate of the firm's common stock value. The firm's CFO has gathered data for performing the valuation using the free cash flow valuation model. The firm's weighted average cost of capital is 11%, and it has $2,380,000 of debt at market value and $480,000 of preferred stock in terms of market value. The estimated free cash flows over the next 5 years, 1 through 5, are given in the table, 1. After year 5, the firm expects its free cash flow to grow by 4% annually. a. Estimate the value of Nabor Industries' entire company by using the free cash flow valuation model. b. Use your finding in part a, along with the data provided above, to find Nabor Industries' common stock value. c. If the firm plans to issue 200,000 shares of common stock,…
QUESTION 1: Westjet Limited is considering building a new manufacturing plant to produce wjets on the land it bought 10 years ago for $5,000,000. The land is currently appraised at 15,000,000. The construction cost of the plant will be $50,000,000. The following market data on the Westjet Limited is current: Common Stock: 2,000,000 shares, selling for $100 each; the beta is 1.5 Debt: 100,000 7% annual coupon bonds, 20 years to maturity, selling for 111.47% of par value. The bonds have $1000 par value each. 1,000,000 shares of 3.5% preferred stock outstanding, selling for $70 per share. Par value is $100 each. Preferred Stock: Expected return on the market 8%, the risk free rate of return is 3%, and the corporate tax rate is 40%. An initial investment of $10,000,000 in net working capital is required. a. Determine the weighted average cost of capital. b. The plant will have 25 years life, will be depreciated straight line, and will have zero salvage value after 25 year. Land will be…

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