Question

Capital Structure Analysis

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Expected EBIT	$600,000
Growth rate in EBIT, gL	0	%
Cost of equity, rs	10	%
Shares outstanding, no	200,000
Tax rate, T (federal-plus-state)	25	%

What is Rivoli's:

intrinsic value of operations (i.e., its unlevered value)? $______

Intrinsic stock price: $______  

Earnings per share: $______

Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity, r_s, will increase to 13% to reflect the increased risk. Bonds can be sold at a cost, r_d, of 6%. Based on the new capital structure, what is the new weighted average cost of capital? Round your answer to three decimal places.  %_______

Levered value of the firm: $_____  

Debt: $_____

Based on the new capital structure, what is the new stock price? $_____  

What is the remaining number of shares? ______

What is the new earnings per share? $_____  

Answer 1