Question
In: Finance
Firm C currently has 320,000 shares outstanding with current market value of $33 per share and...
Firm C currently has 320,000 shares outstanding with current market value of $33 per share and generates an annual EBIT of $1,500,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 9 percent and the current cost of debt is 6 percent. The firm is considering issuing another $3 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost of the new debt will be 7 percent and that the cost of equity will rise to 10 percent with the additional debt. The marginal tax rate is 34 percent.
a. What is the current market value of the firm?
b. What will the firm’s market value be after the announcement of the new debt issue? (Note that total market value of debt will be D0 + D1 and the interest costs that must be subtracted from EBIT when calculating the market value of equity must be calculated in two parts and then added: Kd0D0 + Kd1D1).
c. What will the estimated new share price be after the capital structure change announcement?
d. How many shares are outstanding after the repurchase?
Solutions
jeff jeffy answered 2 years agoRelated Solutions
Firm C currently has 320,000 shares outstanding with current market value of $33 per share and...
Firm C currently has 320,000 shares outstanding with current
market value of $33 per share and generates an annual EBIT of
$1,500,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 9 percent and the current cost of debt is
6 percent. The firm is considering issuing another $3 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with current market value of $42.00 per share and...
Firm C currently has 250,000 shares outstanding with current
market value of $42.00 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with current market value of $42.00 per share and...
Firm C currently has 250,000 shares outstanding with current
market value of $42.00 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and...
Firm C currently has 250,000 shares outstanding with current
market value of $47.40 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and...
Firm C currently has 250,000 shares outstanding with current
market value of $47.40 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with current market value of $42.00 per share and generates an annual EBIT of $1,250,000.
Firm C currently has 250,000 shares outstanding with current
market value of $42.00 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
Firm C currently has 250,000 shares outstanding with currentmarket value of $42.00 per share and...
Firm C currently has 250,000 shares outstanding with current
market value of $42.00 per share and generates an annual EBIT of
$1,250,000. Firm C also has $1 million of debt outstanding. The
current cost of equity is 8 percent and the current cost of debt is
5 percent. The firm is considering issuing another $2 million of
debt and using the proceeds of the debt issue to repurchase shares
(a pure capital structure change). It is estimated that the cost...
A firm has 5 million shares outstanding with a market price of $35 per share. The...
A firm has 5 million shares outstanding with a market price of
$35 per share. The firm has $15 million in extra cash (short-term
investments) that it plans to use in a stock repurchase; the firm
has no other financial investments or any debt. What is the firm's
value of operations after the repurchase? Enter your answer in
millions. For example, an answer of $1.23 million should be entered
as 1.23, not 1,230,000. Round your answer to two decimal
places....
A company currently has 120k shares outstanding, selling at $55 per share. The firm intends to...
A company currently has 120k shares outstanding, selling at
$55 per share. The firm intends to raise $605k through a rights
offering. Management suggests that a discount cannot fall below 13%
as outlined in the previous issue, to which existing shareholders
did not respond with much enthusiasm. They believe that a 37%
discount offer is more appropriate. Also, the CEO is rejecting
calls for raising capital through debt or preferred stock. Net
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A firm has a current book value per share of $21.10 and a market price per...
A firm has a current book value per share of $21.10 and a market
price per share of $37.57. Next year's earnings are expected to be
$5.60 per share and the expected earnings growth rate is 2.5
percent. What is the required rate of return on this stock?
A. 14 percent
B. 15 percent
C. 16 percent
D. 17 percent
E. 18 percent
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