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Assume that a company has $10 million in assets (where the market value of the assets

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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 company?s marginal tax rate is 35% and has 500,000 shares outstanding. The company?s earnings before interest and taxes (EBIT) is $3.88 million. The firm?s 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 firm?s cost of equity will increase to 13% because of the increased risk. The bonds can be sold at a cost of 9%. The firm?s 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. What?s going to be the company?s EPS after the recapitalization?;c. What?s going to be the company?s 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;What?s the times interest earned ratio at each probability level?;Additional Requirements;Min Pages: 1

 

Paper#21896 | Written in 18-Jul-2015

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