Your company, Lariot, earns an EBIT of $25,000,000 per year, and EBIT is expected to remain constant over time. The company pays out all of its earnings at the end of each year. Its earnings growth is zero, its earnings per share equals its dividends per share, and its tax rate is 40 percent. The risk-free rate is 4 percent, and the market risk premium is 10 percent. The company's beta is 1.10, and 2,000,000 shares are outstanding. Your company also has $20,000,000 in perpetual debt with an annual coupon rate of 5 percent, paid annually. Lariot's CFO has hatched a plan to expropriate value from debt holders to equity holders. The company will issue an additional $24.0 million worth of perpetual debt (at par) and use the proceeds for a stock repurchase. The annual coupon rate on the new debt will be 6 percent. The old debt will not be retired and the coupon rate on the original debt will stay at 5.0 percent, although investors will now require 6.0 percent. Based on this transaction, Lariot's investment banker estimates that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Lariot announces the plan. And despite the objections of the old debt holders, the plan is expected to succeed, and the market value of the firm's equity increases. With that, the firm proceeds with the announced recapitalization. Given this information, determine the new price per share after the recapitalization is completed. O $53.53 O $55.85 O $55.08 O $54.30 O $52.75
Your company, Lariot, earns an EBIT of $25,000,000 per year, and EBIT is expected to remain constant over time. The company pays out all of its earnings at the end of each year. Its earnings growth is zero, its earnings per share equals its dividends per share, and its tax rate is 40 percent. The risk-free rate is 4 percent, and the market risk premium is 10 percent. The company's beta is 1.10, and 2,000,000 shares are outstanding. Your company also has $20,000,000 in perpetual debt with an annual coupon rate of 5 percent, paid annually. Lariot's CFO has hatched a plan to expropriate value from debt holders to equity holders. The company will issue an additional $24.0 million worth of perpetual debt (at par) and use the proceeds for a stock repurchase. The annual coupon rate on the new debt will be 6 percent. The old debt will not be retired and the coupon rate on the original debt will stay at 5.0 percent, although investors will now require 6.0 percent. Based on this transaction, Lariot's investment banker estimates that the company's beta would rise to 1.20 if it proceeds with the recapitalization. Lariot announces the plan. And despite the objections of the old debt holders, the plan is expected to succeed, and the market value of the firm's equity increases. With that, the firm proceeds with the announced recapitalization. Given this information, determine the new price per share after the recapitalization is completed. O $53.53 O $55.85 O $55.08 O $54.30 O $52.75
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:Your company, Lariot, earns an EBIT of $25,000,000 per year, and EBIT is expected to remain
constant over time. The company pays out all of its earnings at the end of each year. Its earnings
growth is zero, its earnings per share equals its dividends per share, and its tax rate is 40 percent.
The risk-free rate is 4 percent, and the market risk premium is 10 percent. The company's beta is
1.10, and 2,000,000 shares are outstanding. Your company also has $20,000,000 in perpetual debt
with an annual coupon rate of 5 percent, paid annually.
Lariot's CFO has hatched a plan to expropriate value from debt holders to equity holders. The
company will issue an additional $24.0 million worth of perpetual debt (at par) and use the proceeds
for a stock repurchase. The annual coupon rate on the new debt will be 6 percent. The old debt will
not be retired and the coupon rate on the original debt will stay at 5.0 percent, although investors
will now require 6.0 percent. Based on this transaction, Lariot's investment banker estimates that
the company's beta would rise to 1.20 if it proceeds with the recapitalization.
Lariot announces the plan. And despite the objections of the old debt holders, the plan is expected
to succeed, and the market value of the firm's equity increases. With that, the firm proceeds with
the announced recapitalization.
Given this information, determine the new price per share after the recapitalization is completed.
O $53.53
O $55.85
$55.08
O $54.30
$52.75
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