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Unformatted text preview: Tim Gillespie FIN 440 Week 7 Homework Problem 15-9 The Rivoli Company has no debt outstanding and its financial position is given by the following data: Assets (book = market) $3,000,000 EBIT 500,000 10% Stock price P0 $15 200,000 Tax rate, T(federal-plus-state) 40% V = D+S V= 0 + (15)(200000) Original V = $3,000,000 WACC = 8.96% New V = $3,348,214.29 B. What would be the price of Rivoli’s stock? D = $1,004,464.29 S = $2,343,750.00 New Price Per Share = $16.74 C. What happens to the firm’s earnings per share after the recapitalization? Number of Shares Repurchased = 60000 Number of Remaining Shares = 140,000 New EPS = $1.84 Original EPS = $1.50 Change in EPS = $0.34 Probability EBIT TIE 0.10 $(100,000.00)-1.42 0.20 $200,000.00 2.84 0.40 $500,000.00 7.11 0.20 $800,000.00 11.38 0.10 $1,100,000.00 15.64 Cost of equity rs Shares outstanding, n0 The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. with 30% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk....
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