Question

In: Finance

Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As...

Locomotive 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? (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

Market value
  Before $   
  After $   

  

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.)

  

  Expected return %

  

c.

What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  Expected return %

  

d.

What is the expected return on the firm’s equity after 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.)

  

  Expected return %

Solutions

Expert Solution


Related Solutions

Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt. As...
Locomotive 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% to 50%. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 6.7% per year. Locomotive expects to earn $1.075 million per year in perpetuity. Locomotive pays no taxes. a. What is the market value of Locomotive Corporation before and after the repurchase announcement? b. What...
10. Locomotive Corporation is planning to repurchase part of its common stock by issuing corporate debt....
10. Locomotive 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 45 percent. The firm currently has $10 million worth of debt outstanding. The cost of this debt is 6.5 percent per year. The firm expects to have an EBIT of $3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm...
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As...
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 40 percent to 50 percent. The firm currently has $3.8 million worth of debt outstanding. The cost of this debt is 7 percent per year. The firm expects to have an EBIT of $1.37 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before...
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As...
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...
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As...
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 40 percent to 50 percent. The firm currently has $3.5 million worth of debt outstanding. The cost of this debt is 7 percent per year. The firm expects to have an EBIT of $1.34 million per year in perpetuity and pays no taxes.    a. What is the market value of the firm...
The Kim Su Company is planning to repurchase shares of common stock with the proceeds of...
The Kim Su Company is planning to repurchase shares of common stock with the proceeds of a $50,000,000 debt issue. The interest rate on the debt is expected to be 10%. Currently, Kim Su is unlevered with 12,000,000 common shares outstanding. The price-earnings ratio of the common shares is 5 on pre-tax operating income of $30,000,000. The equity has a required rate of return of 20% based on an equity beta of 1.20. Assuming the company’s tax rate is 34%,...
​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$560 comma 000 ....
​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$560 comma 000 . There are 280 comma 000 shares​ outstanding, and earnings per share are ​$4 . The stock should sell for ​$49 after the​ ex-dividend date.​ If, instead of paying a​ dividend, the firm decides to repurchase​ stock, a. What should be the repurchase​ price? b. How many shares should be​ repurchased? c. What if the repurchase price is set below or above your suggested price...
​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$520 comma 000. There...
​(Repurchase of stock​) The Dunn Corporation is planning to pay dividends of ​$520 comma 000. There are 260 comma 000 shares​ outstanding, and earnings per share are ​$4. The stock should sell for ​$49 after the​ ex-dividend date.​ If, instead of paying a​ dividend, the firm decides to repurchase​ stock, a. What should be the repurchase​ price? b. How many shares should be​ repurchased? c. What if the repurchase price is set below or above your suggested price in part...
As part of the financial planning process, a common practice in the corporate finance world is...
As part of the financial planning process, a common practice in the corporate finance world is restructuring through the process of mergers and acquisitions (M&A). It seems that on a regular basis, investment bankers arrange M&A transactions, forming one company from separate companies. What are the advantages and the disadvantages of a merger? In your response, provide an example of either - a merger that was successful, or one that was unsuccessful. Write a paper of 1,000-1,250 content words with...
Finance 600 : As part of the financial planning process, a common practice in the corporate...
Finance 600 : As part of the financial planning process, a common practice in the corporate finance world is restructuring through the process of mergers and acquisitions (M&A). It seems that on a regular basis, investment bankers arrange M&A transactions, forming one company from separate companies. What are the advantages and the disadvantages of a merger? In your response, provide an example of either - a merger that was successful, or one that was unsuccessful.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT