QUESTION 7You are working for an all equity firm. Your firm's current cost of equity is 8.7 percent and the tax rate is 25 percent.The firm has 450,000 shares of stock outstanding with a market price of $73.20 a share. The firm is considering capitalrestructuring that allows $7.8 million of debt with a coupon rate of 4.5 percent. The debt will be sold at par value andthe proceeds will be used to repurchase shares. What is the value per share after the recapitalization? (Hint: You needto determine the total value of equity after recapitalization that accounts for the PV of interest tax shield and thenumber of shares outstanding after repurchase)$77.71$78.88$80.05$81.22$82.39

Company purchases own shares by issue of debt and this is done to create value for shareholders of…

You are working for an all equity firm. Your firm's current cost of equity is 8.7 percent and the tax rate is 25 per The firm has 450,000 shares of stock outstanding with a market price of $73.20 a share. The firm is considering restructuring that allows $7.8 million of debt with a coupon rate of 4.5 percent. The debt will be sold at par val the proceeds will be used to repurchase shares. What is the value per share after the recapitalization? (Hint: Yo to determine the total value of equity after recapitalization that accounts for the PV of interest tax shield and th number of shares outstanding after repurchase) $77.71 ⚫ $78.88 $80.05 $81.22 $82.39

You are working for an all equity firm. Your firm's current cost of equity is 8.7 percent and the tax rate is 25 per The firm has 450,000 shares of stock outstanding with a market price of $73.20 a share. The firm is considering restructuring that allows $7.8 million of debt with a coupon rate of 4.5 percent. The debt will be sold at par val the proceeds will be used to repurchase shares. What is the value per share after the recapitalization? (Hint: Yo to determine the total value of equity after recapitalization that accounts for the PV of interest tax shield and th number of shares outstanding after repurchase) $77.71 ⚫ $78.88 $80.05 $81.22 $82.39

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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You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC? a. 10.11% b. 8.15% c. 9.28% d. 7.75%
Flemington Farms is evaluating an extra dividend versus a share repurchase. In either case, $15,000 would be spent. Current earnings are $2.80 per share, and the stock currently sells for $75 per share. There are 2,800 shares outstanding. Ignore taxes and other imperfections. The PE ratio will be ____ if the firm issues the dividend as compared to ____ if the firm does the share repurchase.
A firm is currently an all equity firm that has 395,000 shares of stock outstanding with a market price of $19.50 a share. The current cost of equity is 15.5% and the tax rate is 24%. The firm is considering adding $925,000 of debt with a coupon rate of 8% to it's capital structure. The debt will be sold at par value. What is the leveled value of the equity? A) 7,349,475 B) 8 716,950 C) 6,999,500 D) 7,528,275 E) 7,132,050
Boston Company has just paid dividends of $2.5 per share, which the company projects will grow at a constant rate of 5 percent forever. If Boston Company’s shareholders require 15 percent rate of return, what is the price of its common stock? Can you show the excel formula?
Pastel Interiors is currently an all-equity firm that has an annual projected BIT of $136,900. The current cost of equity is 16.5% and the tax rate is 20%. The firm is considering adding $118,000 of debt with a coupon rate of 7.5% to its capital structure. The debt will be sold at par value. What is the value of the unlevered firm (pre-debt)? A $763,570 B $663.758 C $730,133 (D) $696,945 ) $630,570
A firm is currently an all equity firm that has 510,000 shares of stock outstanding with a market price of $53.60 a share. The current cost of equity is 10.5 percent and the tax rate is 25 percent. The firm is considering adding $7.10million of debt with a coupon rate of 6 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity ?
Currently, a firm has $400,000 in debt outstanding and 4,000,000 shares outstanding. The firm is considering changing to an all-equity capital structure, which would result in 5,000,000 shares outstanding. What is the interest rate on the firm's debt if the break-even EBIT is $150,00O?
What is the value of this levered firm? EBIT is $750,000 with an unleveredcost of equity of 10%, tax rate of 21%, and the firm just issued a $1,000,000 bond with a coupon of 6%.
Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm canborrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. Thetax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares. You are required to answer the following:(a) What is the value of the unlevered firm? (b) What will be the value of firm after recapitalization? (c) What is the value of equity in the recapitalized firm? (d) What is the Weighted Cost of Capital of the levered firm?
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