PLease show work when filling out the chart Executive Chalk is financed solely b
ID: 2768785 • Letter: P
Question
PLease show work when filling out the chart
Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10/share. The firm is considering a capital restructuring. It now announces that it intends to issue $160 million of debt and use the proceeds to buy back common stock. The debt will pay an interest of 10%. The firm pays no taxes. Complete Table 13 for the high debt plan, showing the high debt plan earnings per share (EPS) when earnings before interest and taxes (EBIT) is $20,000,000.00.
Table 13
Reliable Gearing Financing Alternatives
Category All Equity (1) High-Debt(2)
Market Value of Debt 0
Shares of Equity 25,000,000
Equity Share Price $10/share
Market Value of Equity $250,000,000
Debt to Equity 0
EBIT $20,000,000 $20,000,000
INT 0
EBT $20,000,000
Taxes 0
EAT $20,000,000
Shares 25,000,000
EPS $0.80/share
Explanation / Answer
The market price of the stock is not affected by the announcement
We have been given that The firm is considering a capital restructuring.So company can buy back as follow
Since the market price of the shares is $10, the company can buy back:
$160 million/$10
= 16 million shares
After the change in capital structure, the market value of the firm is unchanged:
Equity + Debt = (9 million ´ $10) + $160 million = $250 million
After the change in structure, the debt ratio is:
Debt/(Debt + Equity) = $160 million/$250 million = 0.64
High Debt All equity Market Value of Debt 160,000,000 Market Value of Equity 90,000,000 250,000,000 Total 250,000,000 250,000,000 Debt Equity Rati 160/250 0.64 0 EBIT 20,000,000 20,000,000 Less: Interest Payment 16000000 0 EAIBT 4,000,000 20,000,000 Less : Tax 0 0 EAT 4,000,000 20,000,000 No of Shares 9,000,000 25,000,000 EPS 0.44 0.8Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.