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M&M Problem 1 - MRP is 5 The beta for the shoe...

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Finance 3403: Business Finance Spring 2011 The Mad Hatter has his own company – oddly enough, making shoes. “After all, what good is a fabulous cap if your feet hurt from walking around showing it off?” Hatter’s company, The Obvious Shoe (“Shoe”) makes and sells 600,000 pairs of shoes each year. The shoes sell for $20 / pair, and direct materials run $5 / pair. Beyond that, there are no other production expenses. The hatter took the company public several years ago, and 1,500,000 shares are currently outstanding. The risk-free rate of 3% and the
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Unformatted text preview: MRP is 5%. The beta for the shoe company is 1.75. The White Queen arranged for the hatter to meet the Tweedle Bros. Investments Co. The Tweedle brothers have suggested that the hatter use debt to buy-back the firm’s stock. Tweedle has determined that Shoe can issue $10M in risk-free debt if the proceeds are used to retire equity. And that is exactly what he will do. Assume a tax rate of 0% (or 33% for another version). What is the stock price after the recapitalization is complete? What is the new equity beta? How many shares are outstanding?...
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