Question
In: Finance
(SHOW CALCULATIONS PLEASE) The Rivoli Company has no debt outstanding and its financial position is given...
(SHOW CALCULATIONS PLEASE) The Rivoli Company has no debt outstanding and its financial position is given by the following data:
| Market value of Assets | $10,000 |
| EBIT (earnings before interest and tax) | $1,500 |
| Stock price | $10 |
| Shares outstanding | 1,000 |
| Tax rate | 35% |
The firm 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, the bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm and all of its earnings are paid out as dividends. Now answer next 8 questions.
a. What is Rivoli’s current cost of equity?
b. If the risk free rate is 3 percent and the market risk premium is 5 percent, what is Rivoli’s unlevered beta?
c. What is the levered beta at the new capital structure of 40 percent debt?
d. What is the new cost of equity under the capital structure financed with 40 percent debt?
e. What is its new weighted average cost of capital?
f. What is the new total corporate value of Rivoli?
g. What is the new stock price?
h. How many shares remain outstanding after the recapitalization?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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
100,000
Tax rate, T (federal-plus-state)
25
%
What is Rivoli's intrinsic value of operations (i.e., its
unlevered value)? Round your answer to the nearest dollar.
What is its intrinsic stock price? Its earnings per share? Round
your answers to the nearest cent.
Intrinsic stock...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm 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,
rs, will increase to 12%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data: Assets (Market value =
Book value) $3,000,000 EBIT $500,000 Cost of equity, rS 10% Stock
price, P0 $15 Shares outstanding, n0 200,000 Tax rate, T 40%
Unlevered beta 1.0 The firm is considering selling bonds and
simultaneously repurchasing some of its stock. If it moves to a
capital structure with 30% debt based on market values, its cost of
equity, rS, will increase...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = Book value)
$3,000,000
EBIT
$500,000
Cost of equity, rS
10%
Stock price, P0
$15
Shares outstanding, n0
$200,000
Tax rate, T
40%
Unlevered beta
1.0
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 30% debt based on market values, its cost of equity, rS, will
increase...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book
value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T
(federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 35% debt based on market values, its cost of equity, rs, will
increase to 12%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm is considering selling bonds and simultaneously
repurchasing some of its stock. If it moves to a capital structure
with 35% debt based on market values, its cost of equity,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm 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,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding, and its financial position is given by the following...
The Rivoli Company has no debt outstanding, and its financial
position is given by the following data:
Assets (Market value = book value)
$3,000,000
EBIT
$500,000
Cost of equity, rs
10%
Stock price, Po
$15
Shares outstanding, no
200,000
Tax rate, T (federal-plus-state)
40%
The firm 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,
rs, will increase to 11%...
The Rivoli Company has no debt outstanding and its financial position is given by the following...
The Rivoli Company has no debt outstanding and its financial
position is given by the following data: Market value of Assets
$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Tax
rate 35% The firm 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, the bonds can be sold at a
cost, rd, of 8%. Rivoli is a no-growth firm and all of...
The Rivoli Company has no debt outstanding and its financial position is given by the following...
The Rivoli Company has no debt outstanding and its financial
position is given by the following data: Market value of Assets
$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Tax
rate 35% The firm 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, the bonds can be sold at a
cost, rd, of 8%. Rivoli is a no-growth firm and all of...
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