Recapitalization and value of operations

Assignment Help Finance Basics

Reference no: EM1332270

1. Michaely Inc. is an all-equity firm with 200,000 shares outstanding. It has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per shares (DPS). Its tax rate is 40%.

The company is considering issuing $5,000,000 of 10.0% bonds and using the proceeds to repurchase stock. The risk-free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO believes beta would rise to 1.10 if the recapitalization occurs.

Calculate the number of shares to be repurchased. Assuming that the shares can be repurchased at the price that existed prior to the recapitalization, what would be the share price following the recapitalization?

2. Vasudevan Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year: 1 2 3
Free cash flow: -$20 $42 $45

Reference no: EM1332270

Questions Cloud

Explain how specifically does this information affect : Explain how specifically does this information affect your desire to sign a two-year contract with Toy Yachts R Us.

Describe the essential factors that a hrm must consider : Identify and describe the essential factors that a human resource manager must consider prior to their company expanding into a new country located in the United Arab Emirates.

Assume you want to hedge million bond portfolio : Assume you want to hedge a $400 million bond portfolio with a duration of 4.3 years using 10- year Treasury note futures with a duration of 6.7 years.

Recruitment of women and minorities : As human resource officer, your assignment is to recruit talented women and minorities to fulfill the requirements to match community diversification.

Recapitalization and value of operations : Compute the number of shares to be repurchased. Supposing that the shares can be repurchased at the price that existed prior to recapitalization, what would be the share price following the recapitalization?

Explain online gambling : Explain Online gambling and What types of concerns do we need to think about with online gambling

Great order for special plastic lined military uniforms : The Big Black Bird Company (BBBC) has a great order for special plastic lined military uniforms to be used in an urgent military operation.

Explain online auctions : Explain Online auctions and what's to stop us from getting taken on either side of the fence

Illustrtae what situation in which both parties entering : Illustrtae what situation in which both parties entering into a contract could benefit from slightly ambiguous language contained in the contract.

User Account

All Pages