answer

watching

views

indigosardine938Lv1

28 Nov 2020

Reynolds Resorts is currently 100% equity financed. The CFO is considering a recapitalization plan under which the firm would issue long-term debt with a yield of 9% and use the proceeds to repurchase common stock. The recapitalization would not change the company s total assets, nor would it affect the firm s basic earning power, which is currently 15%. The CFO believes that this recapitalization would reduce the WACC and increase the stock price. Which of the following would also be likely to occur if the company goes ahead with the recapitalization plan?

a.The company's net income would increase.

b.The company's earnings per share would decline.

c. The company's cost of equity would increase.

d. The company's ROA would increase.

e. The company's ROE would decline.

answer

watching

154

views

For unlimited access to Homework Help, a Homework+ subscription is required.

You have 0 free answers left.
Get unlimited access to 3.8 million step-by-step answers.

Get unlimited access

Already have an account? Log in

Vaishali YadavLv10

13 Jan 2021

Unlock all answers

Get 1 free homework help answer.

Already have an account? Log in

Related questions

As CFO of Duke Corp., you are considering a recapitalization plan that would convert Duke Corp. from its current all-equity capital structure to one that includes substantial financial leverage. Duke now has 600,000 shares of common stock outstanding, which are selling for $55 each. You expect the firmâs EBIT to be $3,000,000 for the near future. If there is strong expansion in the economy, then EBIT will be 30 percent higher. If there is a recession, then the EBIT will be 40 percent lower.

The recapitalization proposal is to issue $8,250,000 worth of long-term debt, at an interest rate of 6.0 %, and then to use the proceeds to repurchase 150,000 shares of common stock worth $8,250,000. Assuming there are no market frictions such as corporate or personal income taxes,

(a) Calculate the expected ROE and EPS for Duke Corp under each of the three economic scenarios before any debt issue using the table below

Cash Flows to Stockholders and Bondholders Under Current Capital Structure
	Recession	Normal	Expansion
EBIT
Interest (6.0%)
Net income
Shares outstanding
Earnings per share
Return on equity (P0 = $55.00/sh)

(b) Repeat part (a) assuming that the company goes through with recapitalization using the table

Cash Flows to Stockholders and Bondholders Under Proposed Recapitalization
	Recession	Normal	Expansion
EBIT
Interest (6.0%)
Net income
Shares outstanding
Earnings per share
Return on equity (P0 = $55.00/sh)

oliveelephant279

Stephenson Real Estate Recapitalization

Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents the property to tenants. The com-pany has shown a profit every year for the past 18 years, and the shareholders are satisfied with the companyâs management. Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farm-ing operation. The resulting bankruptcy made him ex-tremely averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common stock outstanding. The stock cur-rently trades at $42.50 per share. Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $50 mil-lion. The land will subsequently be leased to tenant farm-ers. This purchase is expected to increase Stephensonâs annual pretax earnings by $12 million in perpetuity. Kim Weyand, the companyâs new CFO, has been put in charge of the project. Kim has determined that the companyâs cur-rent cost of capital is 12.5 percent. She feels that the com-pany would be more valuable if it included debt in its capital structure, so she is evaluating whether the com-pany should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a coupon rate of 8 percent. From her analysis, she also believes that a capital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the pos-sibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate (state and federal).

Questions:

1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2. Construct Stephensonâs market value balance sheet before it announces the purchase.

3. Suppose Stephenson decides to issue equity to finance the purchase. a. What is the net present value of the project? b. Construct Stephensonâs market value bal-ance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firmâs stock? How many shares will Stephenson need to issue to finance the purchase? c. Construct Stephensonâs market value bal-ance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firmâs stock? d. Construct Stephensonâs market value bal-ance sheet after the purchase has been made.

4. Suppose Stephenson decides to issue debt to fi-nance the purchase. a. What will the market value of the Stephenson Company be if the purchase is financed with debt? b. Construct Stephensonâs market value bal-ance sheet after both the debt issue and the land purchase. What is the price per share of the firmâs stock?

5. Which method of financing maximizes the per-share stock price of Stephensonâs equity?

Please show your work so I can match it with my own. Thank you for your expertise!! :)

orchidpug64

Stephenson is evaluating a plan to purchase a huge tract of land in the southeastern United States for $95 million. The land will subsequently be leased to tenant farmers. This purchase is expected to increase Stephensonâs annual pretax earnings by $18.75 million in perpetuity. Jennifer Weyand, the companyâs new CFO, has been put in charge of the project. Jennifer has determined that the companyâs current cost of capital is 10.2 percent. She feels that the company would be more valuable if it included debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversations with investment banks, she thinks that the company can issue bonds at par value with a 6 percent coupon rate. From her analysis, she also believes that a capital structure in the range of 70 percent equityy30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lower rating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporate tax rate (state and federal).

1.If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.

2.Construct Stephensonâs market value balance sheet before it announces the purchase.

3.Suppose Stephenson decides to issue equity to finance the purchase.

A.What is the net present value of the project?

B.Construct Stephensonâs market value balance sheet after it announces that the firm will finance the purchase using equity. What would be the new price per share of the firmâs stock? How many shares will Stephenson need to issue to finance the purchase?

C.Construct Stephensonâs market value balance sheet after the equity issue but before the purchase has been made. How many shares of common stock does Stephenson have outstanding? What is the price per share of the firmâs stock?

D.Construct Stephensonâs market value balance sheet after the purchase has been made.

4.Suppose Stephenson decides to issue debt to finance the purchase.

A.What will the market value of the Stephenson company be if the purchase is financed with debt?

B.Construct Stephensonâs market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firmâs stock?

5.Which method of financing maximizes the per-share stock price of Stephensonâs equity?

taupewildebeest962

Weekly leaderboard

Home

Homework Help 3,900,000

Finance 370,000