Question
In: Finance
. X Corporation plans to announce that it will issue $1.6 million of bonds and use...
. X Corporation plans to announce that it will issue $1.6 million of bonds and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 6%. The company is currently all-equity and worth $6.1 million with 280,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The annual pretax earnings of $1.45 million are expected to remain constant in perpetuity. The tax rate is 21%.
a. What is the expected rate of return on the company’s equity before the announcement?
b. What is the price per share of X’s equity before the announcement?
c. What is the price per share of X’s equity immediately after the announcement?
d. What is the market value of X’s equity immediately after the actual debt issue and repurchase?
e. What is required rate of return on equity (cost of equity) after the capital structure restructuring?
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jeff jeffy answered 1 year agoRelated Solutions
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1. X Corporation plans to announce that it will issue $1.6
million of bonds and use the proceeds to repurchase common stock.
The bonds will sell at par with a coupon rate of 6%. The company is
currently all-equity and worth $6.1 million with 280,000 shares of
common stock outstanding. After the sale of the bonds, the company
will maintain the new capital structure indefinitely. The annual
pretax earnings of $1.45 million are expected to remain constant in
perpetuity. The...
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