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Capital Structure and Leverage 29

Capital Structure and Leverage 29 - zero its earnings per...

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Old Exam Questions - Capital Structure and Leverage Page 29 of 31 Pages 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 6.0 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 an increase in value when the firm announces that it will recapitalize, so that the firm must repurchase all shares at what will be the post-repurchase equilibrium price per share. Given this information, determine what the new equilibrium price will be after the recapitalization is completed.
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