The price per share of an unlevered firm is $5. EBIT is projected to be $50,000. There are no taxes. The board of the firm is considering a capital restructuring where they would repur-chase outstanding stock by borrowing $5,000 at a 10% rate. There are 10,000 shares currently outstanding. a) Assuming that all profits are paid out as dividends to shareholders, what is the EPS or distributions per share back to shareholders if the firm remains unlevered and if the firmrestructures? b) If you own 10 shares of the unlevered firm but prefer the distributions of the levered firm,how could you replicate the payoff of the levered firm yourself? (Provide details on how muchto borrow and how many units of stocks to purchase. Assume that stocks can be purchased in incremental amounts) c) Now suppose the firm levers up and you have a strong preference for the safer unleveredreturns. Again, with our 10 shares, how can you effectively de-lever and obtain the samepayoff as if the firm were unlevered?
The price per share of an unlevered firm is $5. EBIT is projected to be $50,000. There are no taxes. The board of the firm is considering a capital restructuring where they would repur-chase outstanding stock by borrowing $5,000 at a 10% rate. There are 10,000 shares currently outstanding.
a) Assuming that all profits are paid out as dividends to shareholders, what is the EPS or distributions per share back to shareholders if the firm remains unlevered and if the firmrestructures?
b) If you own 10 shares of the unlevered firm but prefer the distributions of the levered firm,how could you replicate the payoff of the levered firm yourself? (Provide details on how muchto borrow and how many units of stocks to purchase. Assume that stocks can be purchased in incremental amounts)
c) Now suppose the firm levers up and you have a strong preference for the safer unleveredreturns. Again, with our 10 shares, how can you effectively de-lever and obtain the samepayoff as if the firm were unlevered?
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