Question
In: Finance
Lowell Inc. has no debt and its financial position is given by the following data: Assets...
Lowell Inc. has no debt and its financial position is given
by
the following data:
Assets (book = market) $3,000,000
EBIT $500,000
Cost of equity (Ks) 10%
Stock price (P0) $15
Shares outstanding n0 200,000
Tax rate T 40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. It if moves to capital
structure
with 30 percent debt based on market values, its cost of
equity,
Ks, will increase to 11 percent to reflect the increased
risk.
Bonds can be sold at a cost (Kd) of 7 percent. Lowell Inc. is
a
no-growth firm. Hence, all its earnings are paid out as
dividends, and earnings are exceptionally constant over time.
a. What would be the new WACC?
b. What effect would this use of leverage have on the value of
the
firm (Va)?
c. What would be Lowell Inc.’s stock price?
d. What happens to the firm’s earnings per share after the
recapitalization?
Solutions
jeff jeffy answered 8 months agoRelated Solutions
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Expected EBIT
$600,000
Growth rate in EBIT, gL
0
%
Cost of equity, rs
10
%
Shares outstanding, no
100,000
Tax rate, T (federal-plus-state)
25
%
What is Rivoli's intrinsic value of operations (i.e., its
unlevered value)? Round your answer to the nearest dollar.
What is its intrinsic stock price? Its earnings per share? Round
your answers to the nearest cent.
Intrinsic stock...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 40% debt based on market values, its cost of equity,
rs, will increase to 12%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data: Assets (Market value =
Book value) $3,000,000 EBIT $500,000 Cost of equity, rS 10% Stock
price, P0 $15 Shares outstanding, n0 200,000 Tax rate, T 40%
Unlevered beta 1.0 The firm is considering selling bonds and
simultaneously repurchasing some of its stock. If it moves to a
capital structure with 30% debt based on market values, its cost of
equity, rS, will increase...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = Book value)
$3,000,000
EBIT
$500,000
Cost of equity, rS
10%
Stock price, P0
$15
Shares outstanding, n0
$200,000
Tax rate, T
40%
Unlevered beta
1.0
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 30% debt based on market values, its cost of equity, rS, will
increase...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book
value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T
(federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 35% debt based on market values, its cost of equity, rs, will
increase to 12%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 35% debt based on market values, its cost of equity,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 40% debt based on market values, its cost of equity,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 40% debt based on market values, its cost of equity,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding and its financial position is given by the following...
The Rivoli Company has no debt outstanding and its financial
position is given by the following data: Market value of Assets
$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Tax
rate 35% The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 40% debt based on market values, the bonds can be sold at a
cost, rd, of 8%. Rivoli is a no-growth firm and all of...
The Rivoli Company has no debt outstanding and its financial position is given by the following...
The Rivoli Company has no debt outstanding and its financial
position is given by the following data: Market value of Assets
$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Tax
rate 35% The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 40% debt based on market values, the bonds can be sold at a
cost, rd, of 8%. Rivoli is a no-growth firm and all of...
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