River Cruises is all-equity-financed. Current Data Number of shares 100,000 Price per share $ 10 Market value of shares $ 1,000,000 State of the Economy Slump Normal Boom Profits before interest $ 73,750 122,500 184,000 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Outcomes Number of Shares ? Price per share $10 market value of shares ? market value of debt ? State of the Economy slump Normal Boom Profits before interest 73,750 122,500 184,000 Interest ? ? ? equity earnings ? ? ? Earnings per share ? ? ? return on shares ? ? ? Expected Outcome

River Cruises is all-equity-financed. Current Data Number of shares 100,000 Price per share $ 10 Market value of shares $ 1,000,000 State of the Economy Slump Normal Boom Profits before interest $ 73,750 122,500 184,000 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Outcomes Number of Shares ? Price per share $10 market value of shares ? market value of debt ? State of the Economy slump Normal Boom Profits before interest 73,750 122,500 184,000 Interest ? ? ? equity earnings ? ? ? Earnings per share ? ? ? return on shares ? ? ? Expected Outcome

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 8P

See similar textbooks

Similar questions

3. Leverage and Earnings. River Cruises (see Section 16.1) is all-equity-financed. Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Rework Table 16.3 by selecting values for (a) to (j) below to show how earnings per share and share return vary with operating income after the financing. (LO16-1) Current Data Number of shares 100,000 Price per share $10 $1 million Market value of shares Outcomes State of the Economy Slump Normal Boom Profits before interest $75,000 $125,000 $175,000 Interest (a) (a) (a) Equity earnings (b) (c) (d) Earnings per share (e) (g) Return on shares (h) (1) Expected outcome :::
River Cruises is all-equity-financed. Current Data Number of shares 100,000 Price per share $ 10 Market value of shares $ 1,000,000 Outcomes State of the Economy Slump Normal Boom Profits before interest $ 83,500 $ 142,000 $ 203,500 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Data Number of shares 100,000 Price per share $10 Market value of shares $10 Market value of debt $1,000,000 Outcomes State of the Economy Slump Normal Boom…
River Cruises is all-equity-financed. Current Data Number of shares 100,000 Price per share $ 10 Market value of shares $ 1,000,000 Outcomes State of the Economy Slump Normal Boom Profits before interest $ 82,000 $ 139,000 $ 200,500 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Data Number of Shares ________? Price per share $10 Market value of shares ________? Market value of debt __________? Outcomes State of the…
An unlevered firm has expected earnings of $4,780,000 and a market value of equity of $56,478,000. The firm is planning to issue $22,591,200 of debt at 5.1 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase? 10.71% 10.58% 10.45% 10.32% 10.19%
River Cruises is all-equity-financed. Number of shares Price per share Market value of shares Profits before interest Number of shares Price per share Market value of shares Market value of debt Profits before interest Interest Equity earnings Earnings per share Return on shares $ Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. Note: Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places. $ Outcomes Current Data 100,000 $ 10 $ 1,000,000 Data Slump 10 Outcomes Slump $ 80,500 80,500 State of the Economy Normal $ 136,000 State of the Economy Normal % $ 136,000 % Expected Outcome Boom $ 197,500 $ Boom 197,500 %
River Cruises is all-equity-financed. Current Data Number of shares 100,000 $ $1,000,000 Outcomes Price per share Market value of shares 10 State of the Economy Slump Normal Вoom Profits before interest $ 82,750 $ 140,500 $ 202,000 Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.) Data Number of shares Price per share Market value of shares Market value of debt 10 Outcomes State of the Economy Slump Normal Вoom Profits before interest $ 82,750 140,500 202,000 Interest Equity earnings Earnings per share Return on shares % % Expected Outcome
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?
Use the following information: Debt: $67,000,000 book value outstanding. The debt is trading at 88% of book value. The yield to maturity is 8%. Equity: 1,700,000 shares selling at $34 per share. Assume the expected rate of return on Federated's stock is 17%. Taxes: Federated's marginal tax rate is Te 0.21. ● ● Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 17.00% (D/V= 0.1700). The interest rate has dropped to 7.6%. The company's business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated's WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) X Answer is complete but not entirely correct. Weighted-average cost of capital 5.85 X %
The finance director of Netra co wishes to estimate what impact the introduction of debt finance is likely to have on the company’s overall cost of capital. The company is currently financed only by equity. Ordinary Shares ( 25 cents par value ) 500,000 Reserves 1,100,000 Total Equity 1,600,000 The company’s current share price is 420 cents, and up to $4 million of fixed rate five year debt could be raised at an interest rate of 10% per year. The corporate tax rate is 33%.The current earnings before interest and tax are $2.5 million. These earnings are not expected to change significantly for the foreseeable future. The company is considering raising either: a) $2 million in debt finance; or b) $4 million in debt finance In either case the debt finance will be used to repurchase ordinary shares. Required: i) Using Modigliani and Miller’s model in a world with corporate tax, estimate…
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
A company currently has cost of equity of 13.0% and cost of debt of 5.0%. Its WACC is 6.2%. What would you recommend to finance their corporate growth over the next few years? Oa. Issue new shares of stock since they are so leveraged O b. Borrow from an insurance company Oc. Issue new bonds since the cost of debt is relatively low. Od. Fund with bank loans and preferred stock O e. Issue convertible bonds
Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.) $7.20 $7.52 $6.00 $6.90

SEE MORE QUESTIONS

Recommended textbooks for you

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

SEE MORE TEXTBOOKS

GET THE APP

About FAQ Academic Integrity Sitemap Document Sitemap

Contact Bartleby Contact Research (Essays)High School Textbooks Literature Guides Concept Explainers by Subject Essay Help Mobile App

GET THE APP

Privacy

Your CA Privacy Rights

Your NV Privacy Rights

About Ads

Manage My Data

bartleby, a Learneo, Inc. business

	Current Data
Number of shares		100,000
Price per share	$	10
Market value of shares	$	1,000,000
	State of the Economy
	Slump	Normal	Boom
Profits before interest	$	73,750		122,500	184,000

	Outcomes
Number of Shares	?
Price per share	$10
market value of shares	?
market value of debt	?
	State of the Economy
	slump	Normal	Boom
Profits before interest	73,750	122,500	184,000
Interest	?	?	?
equity earnings	?	?	?
Earnings per share	?	?	?
return on shares	?	?	?
	Expected Outcome