You are the CFO of an all-equity financed firm. Now, you are evaluating a capital restructuring...

You are the CFO of an all-equity financed firm. Now, you are evaluating a capital restructuring plan to issue some debt and use the proceeds to repurchase some shares. How will the earnings per share (EPS) change with respective to the leverage change? In what circumstances, increasing leverage will be beneficial for shareholders? In what circumstances, increasing leverage will hurt shareholders?

Expert Solution

jeff jeffy answered 5 months ago

Suppose an all-equity financed firm has a cost of capital of 9.5%. The firm is considering...

Suppose an all-equity financed firm has a cost of capital of 9.5%. The firm is considering to invest in a new production facility to manufacture inputs for one of its core products, and has determined that the IRR of this investment equals 7.5%. Alternatively, the firm can acquire a supplier that makes the inputs. The acquisition would require an investment of $90 million and generate a free cash flow of $6.5 million indefinitely. The beta of both alternatives equals 0.9....

Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It...

Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has 20,000 shares outstanding that sell for $25 each. The firm contemplates a restructuring that would borrow $100,000 in perpetual debt at an interest rate of 8% which will be used to repurchase stock. Assume that the corporate tax rate is 35%. (1) Calculate the present value of the interest tax shields and the value of the firm after the proposed restructuring. (2) What...

A company is all-equity-financed with 42,000 shares. It now proposes to issue $170,000 of debt at...

A company is all-equity-financed with 42,000 shares. It now proposes to issue $170,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 17,000 shares. Suppose that the corporate tax rate is 35%. Calculate the increase in cash flow in the combined after-tax income of its debtholders and equityholders if EBIT is $92,000?

Question #3. Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is...

Question #3. Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has 20,000 shares outstanding that sell for $25 each. The firm contemplates a restructuring that would borrow $100,000 in perpetual debt at an interest rate of 8% which will be used to repurchase stock. Assume that the corporate tax rate is 35%. (1) Calculate the present value of the interest tax shields and the value of the firm after the proposed restructuring....

Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has...

Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has 20,000 shares outstanding that sell for $25 each. The firm contemplates a restructuring that would borrow $100,000 in perpetual debt at an interest rate of 8% which will be used to repurchase stock. Assume that the corporate tax rate is 35%. (1) Calculate the present value of the interest tax shields and the value of the firm after the proposed restructuring. (2) What will...

AHN is firm manufacturer. The firm is all-equity financed and has 40 million shares outstanding at...

AHN is firm manufacturer. The firm is all-equity financed and has 40 million shares outstanding at a price of $75 per share. AHN current cost of capital is 7.5%. The firm is considering to buy back $400 million in shares in the open market and to finance the repurchase by issuing bonds. AHN plans to maintain this capital structure indefinitely. At this level of debt, the bonds would be A-rated, and the firm would pay an interest rate of 4.5%.AHN's...

Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost...

Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost of equity of 12.2 percent. The risk-free rate of return is 2.9 percent. The firm is currently considering a project that has a beta of 1.03. What discount rate should be assigned to this project?

River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of debt at...

River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 25,000 shares. Suppose that the corporate tax rate is 21%. Calculate the dollar increase in the combined after-tax income of its debt-holders and equity-holders if profits before interest are: (Do not round intermediate calculations.) a. 75,000 b. 100,000 c. 175,000 what is the increase in cash for for a b and c

River Cruises is all-equity-financed with 54,000 shares. It now proposes to issue $290,000 of debt at...

River Cruises is all-equity-financed with 54,000 shares. It now proposes to issue $290,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 29,000 shares. Suppose that the corporate tax rate is 35%. Calculate the dollar increase in the combined after-tax income of its debtholders and equityholders if profits before interest are: (Do not round intermediate calculations.) Increase in Cash Flow a. $79,000 b. $104,000 c. $179,000

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost...

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost of equity is 16.5% and after-tax cost of debt is 11%. It has the same perpetual EBIT of $500 a year but has a $120 perpetual interest expense. The firm is subject to a 21% tax rate. What is the market value of Tiger Pros?

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