Question

In: Finance

Southwest Sands currently has 19,800 shares of stock outstanding. It is considering issuing $92,000 of debt...

Southwest Sands currently has 19,800 shares of stock outstanding. It is considering issuing $92,000 of debt at an interest rate of 6.3 percent. The break-even level of EBIT between these two capital structure options is $62,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes.

Solutions

Expert Solution

At break-even level of EBIT, EPS under both the situations will be the same.

Unlevered Levered
a EBIT            62,000                62,000
b Less: Interest (92000*6.3%)                     -                    5,796
c EBT (a-b)            62,000                56,204
d Less: Tax                     -                           -  
e Earnings After Tax (c-d)            62,000                56,204
f Shares outstanding*            19,800 X
g EPS (e/f)                 3.13 56204/X

62000/19800 = 56204/X

X = (56204*19800)/62000

= 17949.0193548

Stock Outstanding under levered scheme =  17949

Stocks to be repurchase = 19800-17949

= 1851

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Southwest Sands currently has 24,500 shares of stock outstanding. It is considering issuing $143,000 of debt...
Southwest Sands currently has 24,500 shares of stock outstanding. It is considering issuing $143,000 of debt at an interest rate of 7.8 percent. The break-even level of EBIT between these two capital structure options is $79,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes. 2,717.91 shares 2,964.99 shares 3,286.19 shares 3,459.15 shares 3,747.41 shares
Southwest Sands currently has 19,400 shares of stock outstanding. It is considering issuing $89,000 of debt...
Southwest Sands currently has 19,400 shares of stock outstanding. It is considering issuing $89,000 of debt at an interest rate of 6.2 percent. The break-even level of EBIT between these two capital structure options is $61,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes. Multiple Choice 1,754.90 shares 1,504.20 shares 1,667.16 shares 1,901.15 shares 1,378.85 shares
Southwest Sands currently has 25,500 shares of stock outstanding. It is considering issuing $149,000 of debt...
Southwest Sands currently has 25,500 shares of stock outstanding. It is considering issuing $149,000 of debt at an interest rate of 8.0 percent. The break-even level of EBIT between these two capital structure options is $81,000. How many shares of stock will be repurchased if the company undergoes the recapitalization? Ignore taxes. Multiple Choice 3,216.51 shares 3,752.59 shares 2,948.47 shares 3,564.96 shares 4,065.31 shares
1. An all-equity firm currently has 1,500,000 shares of stock outstanding and is considering borrowing $5,000,000...
1. An all-equity firm currently has 1,500,000 shares of stock outstanding and is considering borrowing $5,000,000 at an annual rate of 7% and buying back one-half of those shares. What amount of annual interest would the firm pay on this borrowing? B. answer $350,000 2. An all-equity firm currently has 3,000,000 shares of stock outstanding and is considering borrowing $8,000,000 at 6% B. answer is $960,000 and buying back one-half of those shares. What is the break-even EBIT assuming a...
The Smith Company currently has 25,000 shares of common stock outstanding. The stock has a par...
The Smith Company currently has 25,000 shares of common stock outstanding. The stock has a par value of $6 per share and a market value of $26 per share – in other words, the price of the stock if you want to buy it is $26 per share. Please make the journal entry required if the company gives the stockholders an 8% stock dividend. Please make the journal entry required if the company gives the stockholders a 40% stock dividend...
The Smith Company currently has 25,000 shares of common stock outstanding. The stock has a par...
The Smith Company currently has 25,000 shares of common stock outstanding. The stock has a par value of $6 per share and a market value of $26 per share – in other words, the price of the stock if you want to buy it is $26 per share. Please make the journal entry required if the company gives the stockholders an 8% stock dividend. Please make the journal entry required if the company gives the stockholders a 40% stock dividend...
Sage Hill Inc. currently has 750,000 shares of common stock outstanding. Sage Hill Inc. is considering...
Sage Hill Inc. currently has 750,000 shares of common stock outstanding. Sage Hill Inc. is considering these two alternatives to finance its construction of a new $1.85 milion plant: 1. Issuance of 185,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.85 million, 8% bonds at face value. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,650,000 $1,650,000 Interest...
Company A currently has a stock price $20/per share, with outstanding shares 2 Mil shares. It...
Company A currently has a stock price $20/per share, with outstanding shares 2 Mil shares. It also has outstanding debt of 20 Mil. Tax rate is 30%. Its annual bond with 10 year maturity date has a price now $886, par value $1000 and coupon rate is 7%. It has a beta of risk 1.2, risk free rate 4% and market index return 9%. Please answer following parts with above information Part1) what is the cost of debt before tax?...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally,...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common...
(WACC) A company has common stock, preferred shares, and debt outstanding. As of today, the common stock is valued at $10 per share, with 2 million shares outstanding. It has a beta of 5, and market return is estimated to be 4% while treasury bills offer 1.5% risk-free rate. The preferred stock is valued at $15 per share, which pays dividend of $2 each year at a constant growth rate of 3%. Preferred stocks have 5 million shares outstanding. Finally,...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT