Capital Structure and Leverage 25

Capital Structure and Leverage 25 - A B C D E 44 15.0 17.0...

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Old Exam Questions - Capital Structure and Leverage Page 25 of 31 Pages A. 15.0% B. 17.0% C. 14.0% D. 16.0% E. 13.0% 44. Assume that your company is an all-equity firm with 2,000,000 shares outstanding. The company’s EBIT is currently $10,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year; its growth is zero, its earnings per share equals its dividends per share, and the company’s tax rate is 40. The company is considering issuing $10.0 million worth of bonds (at par) and using the proceeds for a stock repurchase. The firm’s cost of this debt (their annual coupon rate) would be 7.5 percent. The risk-free rate in the economy is 4 percent, and the market risk premium is 8 percent. The company’s beta is currently 1.00, but its investment bankers estimate that the company’s beta would rise to 1.10 if it proceeds with the recapitalization. Assume that the market does anticipate
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