Reference no: EM131328290
The All-Star Production Corporation (APC) is considering a recapitalization plan that would convert APC from its current all-equity capital structure to one including some financial leverage. APC now has 10,000,000 shares of common stock outstanding, which are selling for $40.00 each, and you expect the firm's EBIT to be $50,000,000 per year, for the foreseeable future. The recapitalization proposal is to issue $100,000,000 worth of long-term debt, at an interest rate of 6.50 percent, and use the proceeds to repurchase as many shares as possible, at a price of $40.00 per share.
Assume there are no market frictions such as corporate or personal income taxes. Calculate the expected return on equity for APC shareholders, under both the current all-equity capital structure and under the recapitalization plan.
a. Calculate the number of shares outstanding, the per-share price, and the debt-to-equity ratio for APC if the proposed recapitalization is adopted.
b. Calculate the earnings per share (EPS) and the return on equity for APC shareholders, under both the current all-equity capitalization and the proposed mixed debt/equity capital structure.
c. Calculate the breakeven level of EBIT, where earnings per share for APC stockholders are the same, under the current and proposed capital structures.
d. At what level of EBIT will APC shareholders earn zero EPS, under the current and the proposed capital structures?
|
Observed relationship between debt ratios and profitability
: What industrial and national capital structure patterns are exhibited globally? What factors seem to be driving these patterns?
|
|
How do stock prices generally react to announcements
: How influential are corporate and personal taxes on capital structure? Historically, have changes in American tax rates greatly affected debt ratios?
|
|
Calculate the expected return on equity for mec shareholders
: Calculate the expected return on equity for MEC shareholders, under both the current all-equity capital structure and under the recapitalization plan.
|
|
Calculate the expected dividend yield-capital gains yield
: Assume that it is now January 1, 2017. Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 16% ..
|
|
Calculate the number of shares outstanding
: Calculate the number of shares outstanding, the per-share price, and the debt-to-equity ratio for APC if the proposed recapitalization is adopted.
|
|
Define the benefits of ownership of the mobile application
: Examine measurable organizational value (MOV). Identify areas of impact, the desired values, and a time frame for achievement.
|
|
Calculate the number of shares outstanding
: Calculate the number of shares outstanding, the per-share price and the debt-to-equity ratio for CSC if the proposed recapitalization is adopted.
|
|
What is the market value and required return of firms stock
: What is the market value and required return of this firm's stock before the repurchase transaction?- What is the market value and required return of this firm's remaining stock after the repurchase transaction?
|
|
What happen to the required return on the companys stock
: Using the proceeds to retire $10 million worth of equity, what would happen to the firm's WACC? What would happen to the required return on the company's stock?
|