Extraordinary dividend the firm repurchased own shares

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Consider an all-equity firm. The face value of the shares is 15€ and the book value of equity is 225 million euros. The company does not have own shares in treasury. The annual EBIT is 36 million euros and the firm has a pay-out ratio of 100%.

a) Prove that the price per share obtained in the previous question is the same as the price per share we would obtain if instead of paying an extraordinary dividend the firm repurchased own shares with the proceedings from the debt issue.

b) Given the new debt ratio (D/E) and the interest on debt given, determine again the expected return on equity. Is it different from before? Explain.

Reference no: EM131459993

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