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A firm currently has equity with a market value of $600,000,000 and debt with a market value of $500,000,000. The firm has 10,000,000 shares outstanding. The bonds offer investors a return of 8%. The firm is contemplating issuing $300,000,000 in new equity and using the proceeds to repurchase $300,000,000 of the firms debt. The corporate tax rate is 35, the effective personal tax rate on equity income is 10% and the effective tax rate on interest income is 20%.

a). What will the firms stock price be immediately after the firm announces its refinancing plan?

b). How many shares will the firm issue?

c). What is the market value of the firm's (i) debt and (ii) equity immediately before the refinancing plan is announced?

d). Calculate the market value of the firm's (i) debt and (ii) equity immediately after the refinancing plan is announced (but before it is actually excuted)

e). Calculate the market value of the firm's (i) debt and (ii) equity after the equity issue and bond repurchase are completed.

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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A firm currently has equity with a market value of $600,000,000 and debt with a market value of $500,000,000. The firm has 10,000,000 shares outstanding. The bonds offer investors a return of 8%. The firm is contemplating issuing $300,000,000 in new equity and using the proceeds to repurchase $300,000,000 of the firm's debt. The corporate tax rate is 35%, the effective personal tax rate on equity income is 10% and the effective personal tax rate on interest income is 20%.

a). What will the firms stock price be immediately after the firm announces its refinancing plan?

b). How many shares will the firm issue?

c). What is the market value of the firm's (i) debt and (ii) equity immediately before the refinancing plan is announced?

d). Calculate the market value of the firm's (i) debt and (ii) equity immediately after the refinancing plan is announced (but before it is actually excuted) e). Calculate the market value of the firm's (i) debt and (ii) equity after the equity issue and bond repurchase are completed.

Martin Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result,the firms debt equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.39 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 round final answer to nearest whole dollar)

Before $

After $

b) What is the expected return on the firms equity before the announcment of the stock repurchase plan? (Do not round intermediate calculations and enter final answer as percent rounded to 2 decimal places)

Expected Return %

c) What is the expected return on the equity of an otherwise identical all equity firm? (Do not round intermediate calculations and enter final answer as a percent rounded 2 decimal places)

Expected Return %

d) What is the expected return on the firms equity after the announcement of the stock repurchase plan? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places)

Expected return %

The Altec Inc. currently has debt with market value of $1,000,000, coupon rate of 6%, and the cost of debt of 6%. Company's earnings before interest and taxes (EBIT) are $560,000, and it is a zero-growth company. Altec's current cost of equity is 10%, and its tax rate is 40%. The firm has 60,000 shares of common stock outstanding selling at a price of $50 per share.

a.) What is Altec's current total market value (V) and weighted average cost of capital (WACC)?

b.) Altec is considering restucturing its capital structure to 40% debt, 60% equity, based on market values. Altec is planning to use the new funds to replace the old debt and the rest to repurchase stock. It is estimated theat the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 8%, while the required rate of return on equity would rise to 12%. If this plan were carried out:

i.) What would be Altec's new WACC

ii.) What would be Altec's new total value (V)

iii.) What would be Altec's new value of debt (D) adn equity (S)

iv.) What would be Altec's new stock price per share?

v.) What would be ALtec's new number shares remaining after the repurchase?

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