capital structure 1. Enya Company is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has RM4.3 million worth of debt outstanding. The cost of this debt is 10 percent per year. Enya expects to have an EBIT of RM1.68 million per year in perpetuity. Enya pays no taxes. I. What is the market value of Locomotive Corporation before and after the repurchase announcement? II. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? III. What is the expected return on the equity of an otherwise identical all-equity firm? IV. What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?

capital structure 1. Enya Company is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has RM4.3 million worth of debt outstanding. The cost of this debt is 10 percent per year. Enya expects to have an EBIT of RM1.68 million per year in perpetuity. Enya pays no taxes. I. What is the market value of Locomotive Corporation before and after the repurchase announcement? II. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? III. What is the expected return on the equity of an otherwise identical all-equity firm? IV. What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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1. Enya Company is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt–equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has RM4.3 million worth of debt outstanding. The cost of this debt is 10 percent per year. Enya expects to have an EBIT of RM1.68 million per year in perpetuity. Enya pays no taxes. 1. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? 2. What is the expected return on the equity of an otherwise identical all-equity firm? 3. What is the expected return on the firm’s equity after the announcement of the stock repurchase plan? answer question 1-3
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