Financial Management: Theory & Practice
15th Edition
ISBN: 9781337248006
Author: Eugene F. Brigham; Michael C. Ehrhardt
Publisher: Cengage Learning US
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Textbook Question
Chapter 14, Problem 12P
Bayani Bakery’s most recent FCF was $48 million; the FCF is expected to grow at a constant rate of 6%. The firm’s WACC is 12%, and it has 15 million shares of common stock outstanding. The firm has $30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has $368 million in debt and $60 million in
- a. What is the value of operations?
- b. Immediately prior to the repurchase, what is the intrinsic value of equity?
- c. Immediately prior to the repurchase, what is the intrinsic stock price?
- d. How many shares will be repurchased? How many shares will remain after the repurchase?
- e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?
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Bayani Bakery's most recent FCF was $48 million; the FCF is expected to grow at a constant
rate of 6%. The firm's WACC is 12%, and it has 15 million shares of common stock outstanding.
The firm has $30 million in short-term investments, which it plans to liquidate and distribute
to common shareholders via a stock repurchase; the firm has no other nonoperating assets.
It has $428 million in debt.
(a) What is the value of operations?
(b) Immediately prior to the repurchase, what is the intrinsic value of equity?
(c) Immediately prior to the repurchase, what is the intrinsic stock price?
(d) How many shares will be repurchased?
(e) How many shares will remain after the repurchase?
(f) Immediately after the repurchase, what is the intrinsic value of equity?
(g) Immediately after the repurchase, what is the intrinsic stock price?
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes.
a.
What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
b.
What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.
What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes.
a.
What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
b.
What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
c.
What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Chapter 14 Solutions
Financial Management: Theory & Practice
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Ch. 14 - Suppose you own 2,000 common shares of Laurence...Ch. 14 - Fauver Enterprises declared a 3-for-1 stock split...Ch. 14 - Harris Company must set its investment and...Ch. 14 - Prob. 11PCh. 14 - Bayani Bakerys most recent FCF was 48 million; the...Ch. 14 - Integrated Waveguide Technologies (IWT) is a...Ch. 14 - Discuss the effects on distribution policy...Ch. 14 - c. (1) Assume that IWT has completed its IPO and...Ch. 14 - (1) Describe the procedures a company follows when...Ch. 14 - Discuss the advantages and disadvantages of a firm...Ch. 14 - Suppose IWT has decided to distribute 50 million,...Ch. 14 - Describe the series of steps that most firms take...Ch. 14 - What are stock splits and stock dividends? What...Ch. 14 - What is a dividend reinvestment plan (DRIP), and...
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