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stock prices and growth




TUTOR HELP 26 NOV.docx Download Attachment;Assume that a company has $10 million in assets (where;the market value of the assets is equal to the book value of;the assets) and no debt. The companys marginal tax rate is;35% and has 500,000 shares outstanding. The companys;earnings before interest and taxes (EBIT) is $3.88 million.;The firms stock price is $27 per share and the cost of equity;is 11%.;The company is thinking of issuing bonds and;simultaneously repurchasing a portion of its stock. If the;company changes its capital structure from no debt to 25%;debt based on market values, the firms cost of equity will;increase to 13% because of the increased risk. The bonds;can be sold at a cost of 9%. The firms earnings are not;expected to grow over time. All of its earnings will be paid;out as dividends.;Answer the following questions;a.;What impact will this utilization of this debt have on the value of the;company?;b.;Whats going to be the companys EPS after the recapitalization?;c.;Whats going to be the companys new stock price?;d.;The $3.88 million EBIT discussed above is determined from this;probability distribution;Probability;EBIT ($);0.05;- 1 million;0.25;2.3 million;0.4;4 million;0.25;5.8 million;0.05;6.1 million;Whats the times interest earned ratio at each probability;level?


Paper#17934 | Written in 18-Jul-2015

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