Question Details

What would be the company- stock price following the repurchase transaction 



 .	Flood Motors is an all-equity firm with 200,000 shares outstanding.  The company- EBIT is $2,000,000, and EBIT is expected to remain constant over time.  The company pays out all of its earnings each year, so its earnings per share equals its dividends per share.  The company- tax rate is 40 percent.

The company is considering issuing $2 million worth of bonds (at par) and using the proceeds for a stock repurchase.  If issued, the bonds would have an estimated yield to maturity of 10 percent.  The risk-free rate in the economy is 6.6 percent, and the market risk premium is 6 percent.  The company- beta is currently 0.9, but its investment bankers estimate that the company- beta would rise to 1.1 if it proceeds with the recapitalization.

Assume that the shares are repurchased at a price equal to the stock market price prior to the recapitalization.  What would be the company- stock price following the recapitalization?

a.	$51.14
b.	$53.85
c.	$56.02
d.	$68.97
e.	$76.03

 
 .	Etchabarren Electronics has made the following forecast for the upcoming year based on the company- current capitalization:

Interest expense	$2,000,000
Operating income (EBIT)	$20,000,000
Earnings per share	$3.60

The company has $20 million worth of debt outstanding and all of its debt yields 10 percent.  The company- tax rate is 40 percent.  The company- price earnings (P/E) ratio has traditionally been 12ï‚´, so the company forecasts that under the current capitalization its stock price will be $43.20 at year end.

The company- investment bankers have suggested that the company recapitalize.  Their suggestion is to issue enough new bonds at a yield of 10 percent to repurchase 1 million shares of common stock.  Assume that the stock can be repurchased at today- $40 stock price.

Assume that the repurchase will have no effect on the company- operating income; however, the repurchase will increase the company- dollar interest expense.  Also, assume that as a result of the increased financial risk the company- price earnings (P/E) ratio will be 11.5 after the repurchase.  Given these assumptions, what would be the expected year-end stock price if the company proceeded with the recapitalization?

	a.	$48.30
	b.	$42.56
	c.	$44.76
	d.	$40.34
	e.	$46.90

 .	Lascheid Enterprises is an all-equity firm with 175,000 shares outstanding. The company- stock price is currently $80 a share.  The company- EBIT is $2,000,000, and EBIT is expected to remain constant over time.  The company pays out all of its earnings each year, so its earnings per share equals its dividends per share.  The firm- tax rate is 30 percent.

The company is considering issuing $800,000 worth of bonds and using the proceeds for a stock repurchase.  If issued, the bonds would have an estimated yield to maturity of 8 percent.  The risk-free rate is 5 percent and the market risk premium is also 5 percent.  The company- beta is currently 1.0, but its investment bankers estimate that the company- beta would rise to 1.2 if it proceeded with the recapitalization. What would be the company- stock price following the repurchase transaction ?

a.	$106.67
b.	$102.63
c.	$ 77.14
d.	$ 74.67
e.	$ 70.40

 .	Buchanan Brothers anticipates that its net income at the end of the year will be $3.6 million (before any recapitalization).  The company currently has 900,000 shares of common stock outstanding and has no debt.  The company- stock trades at $40 a share.  The company is considering a recapitalization, where it will issue $10 million worth of debt at a yield to maturity of 10 percent and use the proceeds to repurchase common stock. Assume the stock price remains unchanged by the transaction, and the company- tax rate is 34 percent.  What will be the company- earnings per share, if it proceeds with the recapitalization?

a.	$2.23
b.	$2.45
c.	$3.26
d.	$4.52
e.	$5.54

 .	TCH Corporation is considering two alternative capital structures with the following characteristics.

	 A 	 B  
Debt/Assets ratio	0.3	0.7
kd	10%	14%

The firm will have total assets of $500,000, a tax rate of 40 percent, and a book value per share of $10, regardless of the capital structure. EBIT is expected to be $200,000 for the coming year.  What is the difference in earnings per share (EPS) between the two alternatives?

a.	$2.87
b.	$7.62
c.	$4.78
d.	$3.03
e.	$1.19




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