Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40. The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company's beta is currently 1.10, but its investment bankers estimate that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Assume that the market does anticipate an increase in value when the firm announces that it will recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase equilibrium price per share. Given this information, determine what the earnings per share will be after the recapitalization is completed. O $6.46 O $7.62 O $6.61 O $7.06 $6.76
Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends per share, and the company's tax rate is 40. The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company's beta is currently 1.10, but its investment bankers estimate that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Assume that the market does anticipate an increase in value when the firm announces that it will recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase equilibrium price per share. Given this information, determine what the earnings per share will be after the recapitalization is completed. O $6.46 O $7.62 O $6.61 O $7.06 $6.76
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter14: Distributions To Shareholders: Dividends And Repurchases
Section: Chapter Questions
Problem 12P: Bayani Bakerys most recent FCF was 48 million; the FCF is expected to grow at a constant rate of 6%....
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Transcribed Image Text:Assume that your company is an all-equity firm with 1,000,000 shares outstanding. The company's
EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company
pays out all of its earnings each year, its growth is zero, its earnings per share equals its dividends
per share, and the company's tax rate is 40.
The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for
a stock repurchase. The firm's cost of this debt (their annual coupon rate) would be 6 percent. The
risk-free rate in the economy is 4 percent, and the market risk premium is 6 percent. The company's
beta is currently 1.10, but its investment bankers estimate that the company's beta would rise to
1.20 if it proceeds with the recapitalization.
Assume that the market does anticipate an increase in value when the firm announces that it will
recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase
equilibrium price per share. Given this information, determine what the earnings per share will be
after the recapitalization is completed.
O $6.46
O $7.62
O $6.61
O $7.06
O $6.76
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