Part A: How much money should you borrow to create the leverage on your own? Assume you can borrow funds at 9 percent interest. Part B. How many additional shares of JKL stock must you purchase (using the borrowed funds in Part A) to create the leverage on your own?
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- Barry's Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?Le Comp Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?Bargain Goods Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (d) What is the cost of equity in the levered company? (e) What is the cost of capital of the levered company?
- Unreliable Company currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $100 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $200,000 with the proceeds used to buy back stock. The high-debt plan would exchange $500,000 of debt for equity. The debt will pay an interest rate of 10%. The firm pays no taxes. Required:(a.) What will be the debt-to-equity ratio and number of shares outstanding after each completed restructuring?(b.) If earnings before interest and tax (EBIT) are $150,000, what will be earnings per share (EPS) if it follows low debt plan? What will EPS be if it follows high debt plan?(c.) Which plan would you recommend? Why?Darlene Corporation has zero debt—it is financed only with common equity. Its total assets are P410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? * Choices: P189,851 P172,200 P180,810 P164,000 P155,800BTC has 15M shares in an all-equity firm, at a price of $13 per share. The firm announced that they will borrow $100M to buy back shares (using the full amount of debt). They will keep this debt permanently. Upon announcement the share price increases to $16 per share. The corporate tax rate is 25%, taxes and financial distress costs are the only relevant market imperfections. What is the present value of the financial distress costs？
- Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…Hutchinson Corporation has zero debt - it is financed only with common equity. Its total assets are $400,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? Select the correct answer. a. $160,000.00 b. $160,011.80 c. $159,988.20 d. $159,964.60 e. $159,976.40
- Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00. It has no debt and 25 million shares outstanding. Now suppose that BBB announces plans to increase its leverage by borrowing $250 million and using the proceeds to repurchase shares. Assuming perfect capital markets, what is the firm value for BBB after this announcement? Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes. What is the value of BBB after this announcement? Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBB's stock decreases to $8 per share following the announcement, then what is the present value of BBB's financial distress costs?Mayr Inc. currently has no debt in its capital structure. It has 50,000 shares outstanding that are selling for $158. The firm's expected EBIT is $400,000 and it pays 30% taxes. The managers are considering issuing $2,000,000 in debt. They will have to pay 4.50% interest on these bonds. They plan to use the proceeds of the bond issue to repurchase shares at the current market price. Calculate the EPS of the firm at both the original and relevered capital structures. If they execute the bond issue and share repurchase what will be the increase or decrease in EPS? EPS will remain the same. EPS will decrease by $0.26. EPS will decrease by $1.26. EPS will decrease by $2.31. EPS will increase by $0.21.You own all the equity of R.G.C. I Ltd. The company has no debt. The company's annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 30%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. i. What is the value of the unlevered firm? ii. What is the value of the levered firm? iii. Assuming a bankruptey cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost?