Reference no: EM132764502

Question - River Cruises is an entirely equity financed company. The current position of the company is as follows:

Number of shares 124000

Price per share $14

Operating income $152,000

Earnings per share $1.23

The CFO of the company is proposing to issue new debt and repurchase the share using the cash from issuing the debt as follows:

Amount of debt issue $868,000

Interest rate of debt 7%

Required -

a. What is the market value of the company now?

b. What is the return on equity of the company? Assume that there is no tax.

c. What will be value of the company after the proposed change in capital structure (assume no-tax world)?

d. What will be the return on equity and return on asset (weighted average cost of capital) with the proposed change assuming no-tax world?

e. What will be the value of company after the proposed changes in capital structure assuming that the company pays 25% tax?

f. What will be the return on equity and return on asset (weighted average cost of capital) with the proposed change assuming that the company pays 25% tax?

g. If the proposed new capital structure induces agency costs and bankruptcy costs, what will the value of the after company? Given that the present value of expected agency cost is $10,000 and the present value of expected bankruptcy cost is $15,000. The tax rate is 25%.