EPS and Debt-to-Equity Premier Stonework's shareholders believe that paying off the company's debt of $13,000,000 with a new stock issue will improve their EPS. Premier's EPS is currently $7.47. There are 1,100,000 shares outstanding that sell for $20 each. Premier's tax rate is 21% and the interest rate on its debt is 8%. What would the EPS be if Premier issued new shares and used the proceeds to retire its debt? Are the shareholders correct in thinking that EPS would go up? Premier's current earnings before interest and taxes (EBIT) is $ to the nearest dollar.) (Round

EPS and Debt-to-Equity Premier Stonework's shareholders believe that paying off the company's debt of $13,000,000 with a new stock issue will improve their EPS. Premier's EPS is currently $7.47. There are 1,100,000 shares outstanding that sell for $20 each. Premier's tax rate is 21% and the interest rate on its debt is 8%. What would the EPS be if Premier issued new shares and used the proceeds to retire its debt? Are the shareholders correct in thinking that EPS would go up? Premier's current earnings before interest and taxes (EBIT) is $ to the nearest dollar.) (Round

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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the kosol co. can raise $200,000 by (1) selling 1,000 shares of common stock at $200 each or (2) selling new bonds that will net the firm $200,000 and carry an interest rate of 9 percent. Currently, the firm has $200,000 of debt at 7% and 2,000 common stock outstanding. If the firm's tax rate is 25 percent, what is the indifferent EBIT (EBIT*)?
Cede & Co can borrow at 11 percent. Cede currently has no debt, and the cost of equity is 12 percent. The current value of the firm is $664,000. The corporate tax rate is 30 percent. Required: What will the value be if Cede borrows $223,000 and uses the proceeds to repurchase shares?
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??
Moss Inc. is considering issuing $1,000,000 worth of perpetual bonds yielding $60,000 interest per year. Moss Inc. currently has no debt outstanding and will use the bond proceeds to repurchase equity. Moss Inc. has 100% dividend payout ratio and EBIT is $2,000,00 per year forever. Corporate tax rate is 60%. a. If the personal tax rate is 30%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why? b. If the shareholders require a 15% return before personal taxes, what is the value of the firm under each plan? (Do not ignore personal taxes). c. Suppose Ts=25% and Tb=35%. What are the investors' cash flows under each plan? Repeat part (b).
You may attempt this question 3 more times for credit Oak Farms is an unlevered firm with 2050 shares outstanding and an EBIT of 675. Corporate eamings are taxed at a rate of 31% Calculate EPS for Oak Farm Note: Your answer should be in dollars and cents. For example, $0.99 Suppose that Oak Farms makes a decision to partition (split) its assets into debt and equity. The firm issues $1550 of debit at a cost of 7.70%, and uses these funds to reduce the amount of equity on its books. The partition does not change the EBIT or the tax rate, but does reduce the number of shares outstanding to 1300 Note: Your answer should be in dollars and cents Compute Oak Farms EPS after the partition s You Must Get Both Parts Conect to Receive Credit CHECK ANSWER
BN Enterprises currently has no debt and a 15.9% cost of equity. The tax rate is 30%. BN plans to issue debt with a cost of 6.7%. The funds will be used to to repurchases shares with a resultant capital structure of 30% debt? What will BN's WACC be after the transaction?
Shadow, Inc., 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 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the expected return on the equity of an otherwise identical all-equity firm? (2) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?
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Shadow, Inc., 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 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?
Refi Corporation 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 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm's debt-equity is expected to rise from 35 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The pretax cost of debt is 6.4 percent. The firm expects to have an aftertax earnings of $940,000 per year in perpetuity. The corporate tax rate is 21 percent. a. What is the expected return on the equity before the repurchase agreement? b. What is the return on assets for the firm? (Hint: use the MM Proposition ll with Tax.) c. What is the expected return on the firm's equity after the repurchase announcement? d. What is the weighted-average cost of capital for the company after the repurchase announcement?.
Tatum can borrow at 6.85 percent. The company currently has no debtand the cost of equity is 11.25 percent. The current value of the firm is $640,000. The corporate tax rate is 24 percent. What will the value be if the company borrows $355,000 and uses the proceeds to repurchase shares?