Question

In: Accounting

The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual...

The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current unlevered beta is 0.5, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. The firm is considering moving to a capital structure that is comprised of 40 percent debt and 60 percent equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 7 percent. The risk free rate is 6 percent and the market risk premium is 5 percent.

1. If this restructuring plan were carried out, what would be AJC’s new levered beta and new cost of equity?

2. What would be AJC's new WACC and total corporate value?

3.What would be its new total market value of debt and total market value of equity respectively?

4.What would be its new stock price per share?

5. How many shares would AJC repurchase in the recapitalization?

6. Should AJC make the capital structure change?

Solutions

Expert Solution


Related Solutions

The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual...
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current unlevered beta is 0.5, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. The firm is considering moving to a capital structure that...
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual...
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current unlevered beta is 0.5, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. The firm is considering moving to a capital structure that...
The XYZ company currently has $200000 market value (and book value) of perpetual debt outstanding carring...
The XYZ company currently has $200000 market value (and book value) of perpetual debt outstanding carring a coupon rate of 6%. Its EBIT are $100000, and it is zero-growth company with 100% payout ratio. XYZ's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10000 shares of common stock outsatnding selling at a price per share of $60. a) XYZ is considering issuing $200000 of addition debt and using the proceeds to repurchase stock....
10-EZ Way has a market value equal to its book value. Currently, the firm has excess...
10-EZ Way has a market value equal to its book value. Currently, the firm has excess cash of $1,332, other assets of $11,674 and equity of $7,200. The firm has 1,200 shares outstanding and net income of $838.EZ Way has decided to spend one-third of its excess cash on a share repurchase program. How many shares of stock will be outstanding after the stock repurchase is completed?
Currently working on a chart for maturity, YTM, Quoted price, book market value, and market value...
Currently working on a chart for maturity, YTM, Quoted price, book market value, and market value weight where would i find that information or how would i calculate it? Currently doing it for Zoeitis
Company A Company B Market Value of Equity $700,000 $900,000 Market Value of Debt $300,000 $200,000...
Company A Company B Market Value of Equity $700,000 $900,000 Market Value of Debt $300,000 $200,000 Cost of Equity 8% 10% Cost of Debt 1.5% 3% Tax Rate 30% 25% Based solely on their current weighted average cost of capital, which company should pursue an investment opportunity with an expected return of 7%? Only Company A · Only Company B · Neither Company A nor Company B · Both Company A and Company B
Here are book and market value balance sheets of the United Frypan Company. Book value balance...
Here are book and market value balance sheets of the United Frypan Company. Book value balance sheet    Net working capital 25 Debt 60 Long term assets    75    Equity 40 100    100 Market value balance sheet    Net working capital    25    debt    60 Long term assets    180 equity    145 205    205 Assume that MM's theory holds except for taxes. There is no growth, and the $60 of debt is expected to...
A particular company has no debt outstanding, total assets of $8,000,000 (book value=market value), EBIT of...
A particular company has no debt outstanding, total assets of $8,000,000 (book value=market value), EBIT of $1,600,000, and a cost of equity of 14%. The price of the company’s stock is $20 per share, the number of shares outstanding is 400,000, and the tax rate for the company is 40%. In an adjustment to its capital structure, the company is considering selling bonds and simultaneously repurchasing some of its stock. If the company moves to a capital structure with 40%...
Rockyford Company must replace some machinery that has zero book value and a current market value...
Rockyford Company must replace some machinery that has zero book value and a current market value of $2,000. One possibility is to invest in new machinery costing $42,000. This new machinery would produce estimated annual pretax cash operating savings of $16,800. Assume the new machine will have a useful life of 4 years and depreciation of $10,500 each year for book and tax purposes. It will have no salvage value at the end of 4 years. The investment in this...
Here are book- and market-value balance sheet the United Frypan Company (figures in $ millions): Book-Value...
Here are book- and market-value balance sheet the United Frypan Company (figures in $ millions): Book-Value Balance Sheet Net working capital $ 40 Debt $ 30 Long-term assets 60 Equity 70 $ 100 $ 100 Market-Value Balance Sheet Net working capital $ 40 Debt $ 30 Long-term assets 195 Equity 205 $ 235 $ 235 Assume that MM’s theory holds except for taxes. There is no growth, and the $30 of debt is expected to be permanent. Assume a 21%...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT