Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Question
Chapter 15, Problem 12P
a)
Summary Introduction
To determine: Value of operations.
b)
Summary Introduction
To determine: Intrinsic value of equity preceding to repurchase.
c)
Summary Introduction
To determine: Intrinsic stock price of company prior to re-purchase.
d)
Summary Introduction
To determine: Number of shares will be repurchased and number of shares after re-purchase.
e)
Summary Introduction
To determine: Intrinsic value of equity and stock price after repurchase.
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A firm’s most recent FCF was $2.4 million, and its FCF is expectedto grow at a constant rate of 5%. The firm’s WACC is 14%, and ithas 2 million shares outstanding. The firm has $12 million in shortterm investments that it plans to liquidate and then distribute ina stock repurchase; the firm has no other financial investments ordebt. Verify that the value of operations is $28 million. Immediatelyprior to the repurchase, what are the intrinsic value of equity andthe intrinsic stock price? ($40 million; $20/share) How manyshares will be repurchased? (0.6 million) How many shares willremain after the repurchase? (1.4 million) Immediately after therepurchase, what are the intrinsic value of equity and the intrinsicstock price? ($28 million; $20/share)
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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.
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?
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Chapter 15 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 15 - Define each of the following terms: a. Optimal...Ch. 15 - How would each of the following changes tend to...Ch. 15 - What is the difference between a stock dividend...Ch. 15 - One position expressed in the financial literature...Ch. 15 - Indicate whether the following statements are true...Ch. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Dividend Payout
The Wei Corporation expects next...Ch. 15 - Prob. 4PCh. 15 - Prob. 5P
Ch. 15 - Prob. 6PCh. 15 - Stock Split
Suppose you own 2,000 common shares of...Ch. 15 - Stock Split Fauver Enterprises declared a 3-for-1...Ch. 15 - Residual Distribution Policy Harris Company must...Ch. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Integrated Waveguide Technologies (IWT) is a...Ch. 15 - Prob. 2MCCh. 15 - Assume that IWT has completed its IPO and has a...Ch. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Suppose IWT has decided to distribute $50 million,...Ch. 15 - Prob. 7MCCh. 15 - Prob. 8MCCh. 15 - Prob. 9MC
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