Reference no: EM131180540
The Rivoli Company has no debt outstanding, and its financial position is given by the following data:
Assets (Market value = book value) $3,000,000
EBIT $500,000
Cost of equity, rs 10%
Stock price, Po $15
Shares outstanding, no 200,000
Tax rate, T (federal-plus-state) 40%
The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.
a. What would be the price of Rivoli's stock? Round your answer to the nearest cent.
b. What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The Firm increased its EPS by how much?? Round to nearest cent.
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