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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- Spring '08
- Leverage, new equilibrium, Curent Assets, Old Exam Questions