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Capital Structure and Leverage 22

Capital Structure and Leverage 22 - $30,000 16.0 2.40 20.00...

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Old Exam Questions - Capital Structure and Leverage Page 22 of 31 Pages A. 2.15% B. 2.83% C. 2.32% D. 2.66% E. 2.49% 38. Assume that you are given the following information about your company: Assets Starting Values Income Statement Starting Values Curent Assets $25,000 Sales $100,000 Net Fixed Assets $25,000 Fixed Costs -$20,000 Total $50,000 Variable Costs -$60,000 EBIT $20,000 Liabilities & Net Worth Starting Values Interest $0 Debt $0 EBT $20,000 Equity (2,500 Shares) $50,000 Taxes (46%) -$9,200 Total $50,000 Net Income $10,800 Now assume that the firm has been given the following information by their investment bankers: Amount Borrowed Cost of Debt Equity Beta Cost of Equity $0 0.0% 1.60 16.00% $10,000 12.0% 1.80 17.00% $20,000 14.0% 2.00 18.00% $30,000
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Unformatted text preview: $30,000 16.0% 2.40 20.00% $40,000 18.0% 2.95 22.75% $50,000 20.0% 3.80 27.00% Assuming that the firm pays out all earnings to its shareholders (EPS = DPS and g = 0%), you should be able to determine the current price of the firm’s stock. Now assume that the firm intends to issue $20,000 of debt and use the proceeds to repurchase shares of stock. Also assume that the market does not anticipate the new stock price and that stockholders sell their shares back at the current price. Eventually (after the firm actually issues the debt and repurchases shares), the market will realize their mistake and a new equilibrium price will be achieved. Determine by how much this new equilibrium price will exceed the current/original price. A. $1.65 B. $2.16 C. $1.82 D. $2.33...
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