River Cruises is all-equity-financed. Suppose it now issues $250,000 of debt at

Question

River Cruises is all-equity-financed.

  

  

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.)

  

Expected Outcome

River Cruises is all-equity-financed.

Explanation / Answer

No of shares to be repurchase=25,000 shares

No of shares outstandig=75,000

Interest=$250,000*10%=$25,000

Outcomes   Number of shares 75,000   Price per share $10            Market value of shares $750,000   Market value of debt $250,000 State of the Economy   Slump    Normal    Boom   Profits before interest $77,500         $130,000         $191,500           Interest $25,000       $25,000       $25,000         Equity earnings $52,500         $105,00          $166,500            Earnings per share $0.7          $1.4          $2.2            Return on shares 7 14 22

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