Question

In: Finance

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

Solutions

Expert Solution

(a) Profit Before Tax is $ 75,000

EPS Before EPS After
EBIT                       75,000.00                        75,000.00
(-) Interest                                      -                          25,000.00
EBT                       75,000.00                        50,000.00
(-) Tax @ 21%                       15,750.00                        10,500.00
EAT                       59,250.00                        39,500.00
No of shares                   1,00,000.00                        75,000.00
EPS = EAT/ No of shares                             0.5925                              0.5267

Combined after-tax income of its debt-holders and equity-holders = 25,000*(0.79) + 39,500 = $ 59,250

(b) Profit Before Tax is $1,00,000

EPS Before EPS After
EBIT                   1,00,000.00                     1,00,000.00
(-) Interest                                      -                          25,000.00
EBT                   1,00,000.00                        75,000.00
(-) Tax @ 21%                       21,000.00                        15,750.00
EAT                       79,000.00                        59,250.00
No of shares                   1,00,000.00                        75,000.00
EPS = EAT/ No of shares                             0.7900                              0.7900

Combined after-tax income of its debt-holders and equity-holders = 25,000*(0.79) + 59,250 = $ 79,000

(c)Profit Before Tax is $1,75,000

EPS Before EPS After
EBIT                   1,75,000.00                     1,75,000.00
(-) Interest                                      -                          25,000.00
EBT                   1,75,000.00                     1,50,000.00
(-) Tax @ 21%                       36,750.00                        31,500.00
EAT                   1,38,250.00                     1,18,500.00
No of shares                   1,00,000.00                        75,000.00
EPS = EAT/ No of shares                             1.3825 1.5800

Combined after-tax income of its debt-holders and equity-holders = 25,000*(0.79) + 1,18,500 = $ 1,38,250


Related Solutions

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
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?
River Cruises is an entirely equity-financed company. The current position of the company is as follows:...
River Cruises is an entirely equity-financed company. The current position of the company is as follows: Number of shares 108761 Price per share $ 11 Operating income $ 140,933 Earning per share $ 1.30 The CFO of the company is proposing to issue new debt and repurchase the share using the cash from issuing the debt as follows: Amount of debt issue $ 299,093 Interest rate of debt 8% i. What is the market value of the company now? ii....
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?
16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and...
16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and raise the debt ratio to 0.40 from 0.0 without changing total assets. It plans to use the proceeds of the debt issue to retire some equity using a share repurchase. How much cash should Lowell borrow? a.            $228,000 b.            $288,000 c.            $328,000 d.            $388,000 e.            $492,000 17. Nashua Inc.'s debt ratio is .25. That is, for every $100 of total assets, it has borrowed...
An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a...
An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a price of $31.30 per share and with an expectation to continue to provide a dividend of $4.75 per share. There are 50,000 preferred shares outstanding, with a 3.10% dividend, $100 par value per share, and $61.80 market value per share. Given this information, what is the company's WACC? a) 13.53 % b) 12.91% c) 13.22 % d) 12.61 % e)12.30 %
Q1) Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at...
Q1) Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15 per share. Now Zemma Corp will change its capital structure by issuing 100 million in debt. The 100 raised by the issue will be used to buyback shares at a fair price. Assume that debt will be permanent debt and that the appropriate cost of debt will be 5%. The current tax rate is 40%. Before the transaction, what is the market value...
Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15...
Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15 per share. Now Zemma Corp will change its capital structure by issuing 100 million in debt. The 100 raised by the issue will be used to buyback shares at a fair price. Assume that debt will be permanent debt and that the appropriate cost of debt will be 5%. The current tax rate is 40%. A. Before the transaction, what is the market value...
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?
For a levered firm, firm’s assets are financed by equity and debt. That is, ?? =...
For a levered firm, firm’s assets are financed by equity and debt. That is, ?? = ?? + ?? , where ?? ,?? & ?? represents asset value, debt value and equity value at time ?. Suppose the firm makes no dividend payment and has a zero-coupon debt maturing at time ?. At maturity, if the value of the company asset is greater than the maturity value of the debt (?? > ??), the company will simply pay off the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT