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A firm currently has no debt. The firm has 15 million shares outstanding and those shares currently have a market price of $25 per share. The firm is contemplating selling $50 million in bonds and using the proceeds to repurchase shares of stock. If they undertake this action, the firm intends to keep this level of debt financing for the foreseeable future. Assume that the corporate tax rate is 30%. Given this data, if the firm announces that they will sell the bonds and repurchase equity what:
(a) do you expect the stock price to be immediately after the announcement?
(b) will be the firm’s total market value of equity immediately after the announcement?
(c) do you expect the stock price to be after the bond issue/repurchase are completed?
(d) will be the firm’s total market value of equity after the bond issue/repurchase are completed?
During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets?
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Binomial Tree Farm’s financing includes $6.7 million of bank loans. Its common equity is shown in Binomial’s Annual Report at $6.84 million. It has 500,000 shares of common stock outstanding, which trade on the Wichita Stock Exchange at $16.3 per sha..
Burklin, Inc., has earnings of $19.5 million and is projected to grow at a constant rate of 6 percent forever because of the benefits gained from the learning curve. Currently, all earnings are paid out as dividends. Estimate the value of the stock.
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