The common stock and debt of the listed French clothing company Fille Provocatrice are valued at EUR500 million and EUR300 million respectively. Shareholders currently require a 9% return and the cost of debt is 3%. Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. If Fille Provocatrice issues an additional USD 100 million of debt and uses this money to buy back shares, what happens to the cost of equity of the stock? The new cost of equity of the stock comes closest to 9.0% 9.5% 10.0% 10.5% D 11.0%

The common stock and debt of the listed French clothing company Fille Provocatrice are valued at EUR500 million and EUR300 million respectively. Shareholders currently require a 9% return and the cost of debt is 3%. Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. If Fille Provocatrice issues an additional USD 100 million of debt and uses this money to buy back shares, what happens to the cost of equity of the stock? The new cost of equity of the stock comes closest to 9.0% 9.5% 10.0% 10.5% D 11.0%

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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Cede & Co can borrow at 11 percent. Cede currently has no debt, and the cost of equity is 12 percent. The current value of the firm is $664,000. The corporate tax rate is 30 percent. Required: What will the value be if Cede borrows $223,000 and uses the proceeds to repurchase shares?
Keet Industries is currently an all-equity firm that pays no taxes. The market value of the firm’s equity is £1,500,000. The cost of the unlevered equity is 12% per annum. Keet plans to issue £500,000 in debt and use the proceeds to repurchase shares. The cost of debt is 8% per annum. What will Keet's cost of equity be after the share repurchase? Select one: 9% 12% 14% 20% None of the above
James is a skiing company in the Isle of man. It has 80 million shares outstanding with a market price of £32 per share and no debt. James has had consistently stable earnings and pays a 25% tax rate. Management plans to borrow €1 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Disregard any costs of financial distress for this question, i.e., you can consider they are always zero. 1. What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value before the announcement of the recapitalization? 2.What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the announcement of the recapitalization, but before the company issues debt? 3.What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after…
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…
Vijay
Rally inc, is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. Suppose Rally offers $3 per share, and shareholders tender their shares at this price. What will be Rally’s share price after the repurchase?
Farmington Company can borrow at 7.05 percent. The company currently has no debt and the cost of equity is 11.45 percent. The current value of the firm is $660,000. The corporate tax rate is 23 percent. What will the value be if the company borrows $375,000 and uses the proceeds to repurchase shares?
United Uninsured Underwriters (U3) needs $192 million to stay in business. If new common stock is issued, U3 must pay its investment banker a fee equal to 8 percent of the total amount issued. The new issue will also require Us to pay $280,000 in fees to its lawyers, printing costs, and other costs associated with the issue. U3 can issue stock at $25 per share. How many shares of common stock must Us issue so that it has $192 million after flotation costs? Show how much of the total dollar amount of the issue will be flotation costs and how much U3 will receive after the flotation costs are paid.
Overnight Publishing Company (OPC) has $2.7 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm's debt is held by one institution that is willing to sell it back to OPC for $2.7 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the $2.7 million in cash to buy back some of its stock on the open market. Repurchasing stock also has no transaction costs. The company will generate $1,320,000 of annual earnings before interest and taxes in perpetuity regardless of its capital structure. The firm immediately pays out all earnings as dividends at the end of each year. OPC is subject to a corporate tax rate of 22 percent and the required rate of return on the firm's unlevered equity is 13 percent. The personal tax rate on interest income is 20 percent and there are no…

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