Q1. An all-equity financed firm has 1 million shares outstanding, currently selling at $10 per share....

Q1. An all-equity financed firm has 1 million shares outstanding, currently selling at $10 per share. It considers a restructuring that would issue $4 million in debt to repurchase 400,000 shares. How does this affect overall firm value?

Q2: What is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 30% of assets?

Q3: What is the expected rate of return to shareholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC, and a 60% debt-asset ratio?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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...

Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $37...

Ashman Motors is currently an all-equity firm. It has two million shares outstanding, selling for $37 per share. The company has a beta of 0.9, with the current risk-free rate at 3.1% and the market premium at 7.6%. The tax rate is 25% for the company. Ashman has decided to sell $37 million of bonds and retire half its stock. The bonds will have a yield to maturity of 7.4%. The beta of the company will rise to 1.3 with...

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...

Your firm has 10 million shares outstanding currently priced at $40 a share. There is no...

Your firm has 10 million shares outstanding currently priced at $40 a share. There is no debt. The firm wishes to raise $15 million through a rights-issue with subscription price of $15. a) How many rights would be needed to buy a new share? b) What is the total value of the firm before and after the rights-issue? c) What is the total number of shares after rights-issue? d) What is the share price after the issue (the ex-rights price)?...

Titanic Corporation has 10 million share outstanding, selling currently at a price of $50 per share....

Titanic Corporation has 10 million share outstanding, selling currently at a price of $50 per share. The company expects earnings per share next year to be $7.50. The company retains one-third of each year's earnings and reinvests these funds in projects with an expected return of 15% (thus, ROE is 15%) What Rate of return do the shareholders require? Suppose that, unexpectedly, the company announces plans to retain an additional $3 per share for the next ten years. These additional...

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 earnings after taxes (EAT) are $538k. Furthermore, a...

a. An all-equity company ABC has nine million outstanding shares, with a share price currently at...

a. An all-equity company ABC has nine million outstanding shares, with a share price currently at £55. The company also has outstanding debt valued at £75 million. Equity cost of capital is 6.5%. The company has made an announcement of issuing new debt valued at £210 million. The proceeds of this issue will be used to repay outstanding debt and to pay out an immediate dividend. Assume capital markets are perfect. Required: i. What is the share price just after...

An all-equity business has 200 million shares outstanding selling for $30 a share. Management believes that...

An all-equity business has 200 million shares outstanding selling for $30 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $750 million in debt and repurchase 25 million shares. a. What is the market value of the firm prior to the recap? What is the market value of equity? b. Assuming the irrelevance proposition holds, what is the market value of the firm after the recap? What...

An all-equity business has 100 million shares outstanding, selling for $20 a share. Management believes that...

An all-equity business has 100 million shares outstanding, selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a dividend recapitalization. It will raise $1 billion in debt and repurchase 50 million shares. Do equity shareholders appear to have gained or lost as a result of the recap? Please explain. Assume now that the recap increases total firm cash flows, which adds $100 million to the value of the firm. Now what is...

Valley Corp.'s stock is currently selling at $40 per share. There are 1 million shares outstanding....

Valley Corp.'s stock is currently selling at $40 per share. There are 1 million shares outstanding. The firm is planning to raise $2 million to finance a new project. What are the ex-rights stock price, the value of a right, and the appropriate subscription prices under the following scenarios? a. Two shares of outstanding stock are entitled to purchase one additional share of the new issue. (Do not round intermediate calculations and round your answers to 2 decimal places,...

Subjects