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Capital Structure and Leverage 12

Capital Structure and Leverage 12 - B C D E 17 $20 29 $20...

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Old Exam Questions - Capital Structure and Leverage Page 12 of 31 Pages B. $20.29 C. $20.61 D. $20.44 E. $19.86 17. Your company has made the following forecast for the upcoming year based on the company's current capitalization: Interest expense $ 2,000,000 Operating income (EBIT) $20,000,000 Earnings per share $ 3.60 The company has $20 million worth of debt outstanding and all of its debt yields 10 percent. The company's tax rate is 40 percent. The company's price earnings ratio has traditionally equaled 12, so the company forecasts that under the current capitalization its stock price will be ($3.60)(12) = $43.20 at the end of the year (P 1 ). The company's investment bankers have suggested that the company do a recapitalization. Their suggestion is to issue enough new bonds at a yield of 10 percent to repurchase 1 million shares of common stock, and believe that the stock can be repurchased at today's current price of $40 per share (P
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