Question

Firm C currently has 250,000 shares outstanding with current market value of $42.00 per share and...

Firm C currently has 250,000 shares outstanding with current market value of $42.00 per share and generates an annual EBIT of $1,250,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 8 percent and the current cost of debt is 5 percent. The firm is considering issuing another $2 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost of the new debt will be 5.5 percent and that the cost of equity will rise to 8.48 percent with the additional debt. The marginal tax rate is 30 percent.

What is the firm's net income after the recapitalization?

Note: The total interest costs that must be subtracted from EBIT must be calculated in two parts and then added:    

Homework Answers

Answer #1

1. Interest on current debt = Debt Amount * interest rate = $1000000 * 5% = $50000

2. Interest on New debt = Debt Amount * interest rate = $2000000 * 5.50% = $110000

3. Total interest = Interest on current debt + Interest on New debt

Total interest = 50000 +110000

Total interest = $160000

4. Net Income after recapitalization = (EBIT - Total Interest) * (1 - Tax)

Net Income after recapitalization = (1250000 - 160000) * (1 - 30%)

Net Income after recapitalization = $763000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and...
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and generates an annual EBIT of $1,250,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 8 percent and the current cost of debt is 5 percent. The firm is considering issuing another $2 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost...
The ABC firm is currently unlevered and is valued at $800,000. Assuming the current of cost...
The ABC firm is currently unlevered and is valued at $800,000. Assuming the current of cost of equity is 10%. If the firm is issuing $250,000 in new debt with an 7.6% interest rate. it would repurchase $250,000 of stock with the proceeds of the debt issue. There are currently 28,000 shares outstanding and its effective marginal tax bracket is 25%. If cost of equity increases to 12.82%, what will ABC’s new WACC be after debt issue?
Newell Corporation is currently an all equity firm. Its current cost of equity is 10.8 percent...
Newell Corporation is currently an all equity firm. Its current cost of equity is 10.8 percent and the tax rate is 25 percent. The firm has 450,000 shares of stock outstanding with a market price of $54 a share. The firm is considering capital restructuring that allows $4.8 million of debt with a coupon rate of 6.2 percent. The debt will be sold at par value and the proceeds will be used to repurchase shares. What is the value per...
Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and...
Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 40%. The company is considering issuing $4,500,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta...
3G is an all-equity firm with 200,000 shares outstanding, has $2,000,000 of EBIT, which is expected...
3G is an all-equity firm with 200,000 shares outstanding, has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the...
Cross Town Cookies is an all-equity firm with a total market value of $765,000. The firm...
Cross Town Cookies is an all-equity firm with a total market value of $765,000. The firm has 46,000 shares of stock outstanding. Management is considering issuing $188,000 of debt at an interest rate of 6 percent and using the proceeds to repurchase shares. Before the debt issue, EBIT will be $69,200. What is the EPS if the debt is issued? Ignore taxes.
An all - equity firm with 200,000 shares outstanding. Antwerther Inc, has $2,000,000 of EBIT, which...
An all - equity firm with 200,000 shares outstanding. Antwerther Inc, has $2,000,000 of EBIT, which is expected to remain constant in the future.The company pays out all its earnings, so earnings pet share(EPS) equal dividends per share(DPS).Its tax rate is 40%. The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk- free rate is 6.5%, the market risk premium is 5.0% and beta is currently 0.90, but the CFO belives beta...
Consider an all-equity firm with 125,000 shares outstanding. Assume that EBIT=800,000 and that EBIT will remain...
Consider an all-equity firm with 125,000 shares outstanding. Assume that EBIT=800,000 and that EBIT will remain constant, the firm pays out all profits (EPS = dividends per share) as dividends, and that its tax rate is 40%. If the firm’s beta is 1.1, the risk-free rate is 4%, and the market risk premium is 6%, what is the firm’s stock price according to the dividend growth model? Now assume the firm is considering issuing $1.2m in debt at before-tax cost...
Castle, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest...
Castle, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $42,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 18 percent higher. If there is a recession, then EBIT will be 30 percent lower. The firm is considering a debt issue of $100,000 with an interest rate of 8 percent. The proceeds will be used to repurchase shares...
Wilton's Market is an all-equity firm with a total market value of $260,000 and 12,000 shares...
Wilton's Market is an all-equity firm with a total market value of $260,000 and 12,000 shares of stock outstanding. Management is considering issuing $60,000 of debt at an interest rate of 7 percent and using the proceeds on a stock repurchase. As an all-equity firm, management believes the earnings before interest and taxes (EBIT) will be $26,000 if the economy is normal, $8,000 if it is in a recession, and $35,000 if the economy booms. Ignore taxes. If the economy...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT