Selling Bonds and Purchasing Stock of Rivoli Company
Not what you're looking for?
Rivoli Company has no debt outstanding, financials are:
Assets (book = market) $3,000,000
EBIT $500,000
Cost of equity 10%
Stock price $15
shares outstanding 200,000
Tax rate 40%
Firm considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity will increase to 11% to reflect risk. Bonds could be sold at cost of 7%, no growth firm, all earnings paid as dividends. Earnings expected to be constant over time.
a) What effect would this use of leverage have on value of firm?
b) What would be price of Stock?
c) What happens to firms earnings per share after recapitalization?
d) $500,000 EBIT given previously is actually expected value from following probability distribution:
Probability EBIT
.10 ($100,000)
.20 200,000
.40 500,000
.20 800,000
.10 1,100,000
Determine the times-interest-earned ratio for each probability. What is the probability of not covering interest payment at 30% debt value?
Purchase this Solution
Solution Summary
Capital stucture analysis, leverage, recapitalization, and expected value are calculated for Rivoli Company.
Education
- MBA, Indian Institute of Finance
- Bsc, Madras University
Recent Feedback
- "I've posted a similar question for another course. It's post 657940, and it's a practice problem that I'd like to use for the final exam. Your help will be greatly appreciated. "
- "thank you!"
- "Thank you again Jayant. You are super fast. "
- "Thank you Jayant. You are appreciated. "
- "Again, thank you Jayant. You are wonderful. "
Purchase this Solution
Free BrainMass Quizzes
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Motivation
This tests some key elements of major motivation theories.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Managing the Older Worker
This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.