River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $280,000 of debt at an interest rate of 12% and use the proceeds to repurchase 28,000 shares at $10 per share. Profits before interest are expected to be $128,000.
a. What is the ratio of price to expected earnings for River Cruises before it borrows the $280,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price-earnings ratio
b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Price-earnings ratio
| River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $280,000 of debt at an interest rate of 12% and use the proceeds to repurchase 28,000 shares at $10 per share. Profits before interest are expected to be $128,000. |
| a. | What is the ratio of price to expected earnings for River Cruises before it borrows the $280,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price-earnings ratio |
| b. | What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Price-earnings ratio | |
Related questions
| Makers Corp. had additions to retained earnings for the year just ended of $194,000. The firm paid out $184,000 in cash dividends, and it has ending total equity of $4.89 million. The company currently has 120,000 shares of common stock outstanding. |
| What are earnings per share? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| Earnings | $ per share |
| What are dividends per share? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| Dividends | $ per share |
| What is the book value per share? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| Book value | $ per share |
| If the stock currently sells for $62 per share, what is the market-to-book ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| Market-to-book ratio | times |
| What is the price-earnings ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16.) |
| Price-earnings ratio | times |
| If the company had sales of $3.96 million, what is the price-sales ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.) |
| Price-sales ratio | times |
14)
| Green Manufacturing, Inc., plans to announce that it will issue $1.91 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 7 percent. Green is currently an all-equity firm worth $4.74 million with 310,000 shares of common stock outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pretax earnings of $1.41 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 30 percent. |
| a. | What is the expected return on Greenâs equity before the announcement of the debt issue? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Expected return | % |
| b. | What is the price per share of the firmâs equity? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| Price per share | $ |
| c. | What is Greenâs stock price per share immediately after the repurchase announcement? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| New share price | $ |
| d-1. | How many shares will Green repurchase as a result of the debt issue? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| Shares repurchased |
| d-2. | How many shares of common stock will remain after the repurchase? (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).) |
| New shares outstanding |
| e. | What is the required return on Greenâs equity after the restructuring? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) |
| Required return | % |
