The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the firm pays no taxes.

The company now makes a further $250,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity to rise to 10.83%. Assume the firm pays no taxes.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

See similar textbooks

Related questions

Q: Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The…

A: given information market value = 1 million cost of debt = 5% cost of equity = 10% company make a…

Q: The financial breakeven point of Soillnc. is P90,000,while the tax rate applicable to the company is…

A: The financial breakeven can be calculated by using this equation EBITFinBE =Interest cost +Preffered…

Q: Once Bitten Corp. uses no debt. The weighted average cost of capital is 5.2 percent, and the…

A: value of equity = EBIT in perpetuity / cost of capital

Q: Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4…

A: Money to be raised : $8 million Debt repayment : $2.4 million Assets purchase : $5.6 million…

Q: Last year Rattner Robotics had $5 million in operatingincome (EBIT). Its depreciation expense was $1…

A: “Hey, since your question has multiple sub-parts, we will solve first three sub-parts for you. If…

Q: The market value of Stan Company's equity is P15 million, and the market value of its risk free debt…

Q: Calvert Corporation expects an EBIT of $25,500 every year forever. The company currently has no…

A: Given information, EBIT = $25,500 Cost of Equity = 15.4% Borrow rate = 10.2% Tax rate =21%

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Outstanding loan = P 350000 Interest rate = 5% Tax rate = 20% Preferred dividends = P 16500

Q: The W.C. Corp. has $600,000 of interest-bearing debt outstanding, and it pays an annual interest…

Q: Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent…

A: Profit margin denotes the percentage of profit amount which a firm or an individual earns from the…

Q: Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a…

A: given information debt to equity ratio is expected to rise from 30 percent to 50 percent. cost of…

Q: RAK, Inc., has no debt outstanding and a total market value of $220,000. Earnings before interest…

A: A firm's capital structure represents a mix of debt and equity utilized to finance the business…

Q: Maslyn Corp. has an EBIT of $985,000 per year that is expected to continue in perpetuity. The…

A: Value of the company consists of two components. One is debt or debentures held by the company and…

Q: The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,and it pays an annual…

A: Given, The W.C. Pruett Corp. has $600,000 of interest-bearing debt outstanding,and it pays an annual…

Q: s financed equally by debt and equity, each with a market value of $1 million. The cost of debt is…

A: The company raises money through debt and equity and capital structure depends on the debt and…

Q: a. What is the current value of the company? (Do not round intermediate calculations and round…

A: Value of Firm: It is the value of creditors' and shareholders' claims altogether. NOTE: As per…

Q: Jordan, Corp., has debt outstanding with a market value of $3 million. The value of the firm would…

A: Bankruptcy Cost: The dollar value that a firm incurs for undertaking bankruptcy procedure is the…

Q: Firm A has $10,800 in assets entirely financed with equity. Firm B also has $10,800 in assets, but…

A: Answer Firm a firm b Sell units 11,000 11,000 Sales price $3 $3 Total sales price…

Q: Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The…

A: The question is related to Cost of capital. It is given that the present capital structure consists…

Q: Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent…

A: TIE ratio means Times interest earned ratio which denotes the capacity of the firm to pay the…

Q: How much debt does the company now have, to the nearest thousand dollars? How much equity? What is…

A: Weighted average cost of capital (WACC) refers to the joint cost of company's capital from all the…

Q: onrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4…

A: Debt Ratio is the ratio of total debt to total assets. in the balance sheet. Let us look at balance…

Q: Once Bitten Corp. uses no debt. The weighted average cost of capital is 9 percent. If the company's…

A: Given EBIT = $1980000 Cost of capital = 9%

Q: Harrier Company, which is just being formed, needs $1 million of assets and it expects to have a…

A: Return on value (ROE) is a proportion of monetary execution determined by partitioning net gain by…

Q: uses the cost

A: The amount which is invested by the proprietor or partner in the business is known as capital. The…

Q: Griffin Doors earns $1 million in annual EBIT in perpetuity on its $5million in assets. After…

A: Note: we will answer the first three question including subparts as per policy The question will…

Q: The tax rate applicable to Ivan Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

A: Interest paid = Face value of Loan * Interest rate =350000 * 5% = 17500

Q: (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What…

A: Equity share capital refers capital which is raised by a corporation by offering shares.

Q: Packaging's ROE last year was only 4%, but its management has developed a new operating plan that…

Q: Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The…

A: As per our guidelines, we are supposed to answer only 3 sub parts ( if there are multiple sub parts…

Q: Abacus Calculation Company and Zoom Calculators Inc. are identical except for capital structures.…

A: Equity:- Equity is the form of shares that is issued by the firm and represents the value that must…

Q: Once Bitten Corp. uses no debt. The weighted average cost of capital is 5.2 percent, and the…

A: EBIT are returns available to an entity before paying any cost of finance to debtholders. EBIT shows…

Q: Maslyn Corp. has an EBIT of $985,000 per year that is expected to continue in perpetuity. The…

A: The calculation of value of unlevered company has been made as follows: Value of unlevered…

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

Q: Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The…

A: The question is related to Cost of capital. It is given that the present capital structure consists…

Q: Duncan plc is financed by 5 million shares of equity with a market capitalisation of £90 million,…

A: “Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…

Q: Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the…

A: The question is related to the theories of Capital Structure. As per Modigliani and Miller…

Q: The financial breakeven point of Soil Inc. is P90,000, while the tax rate applicable to the company…

A: Interest paid = Outstanding loan * Interest rate = 200000*10% = P20000

Q: Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The…

A: It is given that :before refinancing :equity = debt = $1,000,000 Cost of debt – 5% Cost of equity…

Q: French company has debt outstanding with a face value of $5 million. The value of the firm if it…

A: According to the M & M proportion, I with taxes shows the value of the levered firm by the…

Q: Connor Corp. has an EBIT of $970,000 per year that is expected to continue in perpetuity. The…

A: Company valuation or business valuation is the process of assessing the total economic value of a…

Q: Cowen Company has EBIT of 600,000, company's Debt-to-equity ratio (market value) is 0.6, and the…

A: Meaning of cost of capital:- It represents the return of a company that needs to achieve in order…

Question

Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost of
debt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt and
uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equity
to rise to 10.83%. Assume the firm pays no taxes.
What is the percentage increase in earnings per share after the refinancing?

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of 2.5 million is received from sale of the assets?
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost ofdebt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt anduses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equityto rise to 10.83%. Assume the firm pays no taxes.1. How much debt does the company now have?
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost ofdebt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt anduses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equityto rise to 10.83%. Assume the firm pays no taxes.1. How much debt does the company now have?2. How much equity does it now have?3. What is the overall cost of capital?
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost ofdebt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt anduses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equityto rise to 10.83%. Assume the firm pays no taxes.1. How much debt does the company now have?2. How much equity does it now have?3. What is the overall cost of capital?4. What is the percentage increase in earnings per share after the reÖnancing?5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost ofdebt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt anduses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equityto rise to 10.83%. Assume the firm pays no taxes.4. What is the percentage increase in earnings per share after the refinancing?5. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?)
Buggins Inc. is financed equally by debt and equity, each with a market value of $1 million. The cost ofdebt is 5%, and the cost of equity is 10%. The company now makes a further $250,000 issue of debt anduses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.5% and the cost of equityto rise to 10.83%. Assume the firm pays no taxes. 1. What is the overall cost of capital?2. What is the percentage increase in earnings per share after the refinancing?3. What is the new price-earnings multiple? (Hint: Has anything happened to the stock price?) Unfortunately my question was answered incorrectly, I am hoping for the right answer