Compute the expected return on equity

Reference no: EM131955735

Question: As chief financial officer of Magnificent Electronics Corporation (MEC), you are considering a recapitalization plan that would convert MEC from its current all-equity capital structure to one that includes substantial financial leverage. MEC now has 490,000 shares of common stock outstanding, which are selling for $50 each. You expect the firm's annual cash flow, before interest and taxes, to be $2,000,000 for the foreseeable future. The recapitalization proposal is to issue $12,250,000 worth of long-term debt, at an interest rate of 6.0%, and then to use the proceeds to repurchase 245,000 shares of common stock worth $12,250,000.

1. Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders under the current all-equity capital structure. Round your answer to two decimal places

2. Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders under the proposed recapitalization. Round your answer to two decimal places.

Reference no: EM131955735

Questions Cloud

Evaluate strategies used to reduce cannabis related harms : Your task is to critically evaluate one of the strategies (or group of strategies) used to reduce cannabis related harms.

What is the present value of car payments : If the discount annual rate is 16.36 percent compounded monthly, what is the present value of the car payments?

Compute the effective annual interest rate of the loan : If Chester Lampwick borrows $14,000 for three months at an annual interest rate of 16 percent paid up-front with a compensating balance of 10 percent.

What is portfolio expected return : What is the portfolio expected return if the expected returns on these stocks is 13.7%, 6.5%, and 7.9% respectively?

Compute the expected return on equity : Assuming there are no market frictions such as corporate or personal income taxes, calculate the expected return on equity for MEC shareholders.

Firm latest annual financial results include the numbers : Your firm's latest annual financial results include the numbers listed below. Given these, what is total asset turnover?

Estimate the magnitude of the gravitational force : You are seated in your physics class next to another student 0.60 m away. Estimate the magnitude of the gravitational force between you.

Short term cash use due to projected cash flow : Smith Enterprises is looking to obtain a loan for short term cash use due to a projected cash flow problem.

What encryption algorithm is being used for confidentiality : Which version of SSL/TLS protocol is being use? What encryption algorithm is being used for confidentiality? What hashing algorithm is being used for integrity?

User Account

All Pages