The Anderson Company Ltd. (ACL) currently has $200,000 market value (and book va
ID: 2796304 • Letter: T
Question
The Anderson Company Ltd. (ACL) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. ACL's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
Now, assume that ACL is considering changing from its original capital structure to a new capital structure that results in an increased cost of equity to 9.5%. The resulting capital structure would have a $402,684.60 total market value of equity and a $604,026.80 market value of debt. How many shares would ACL repurchase in the recapitalization?
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Explanation / Answer
Current Position
EBIT
100000
Interest
12000
Ebt
88000
Tax
35200
EAT
52800
Share
10000
Price
60
Value
600000
ROE (EAT/Value)*100
8.8%
Revised Position:
Ebit
100000
Interest (604026.80*6%)
36241.608
EBT
63758.392
Tax
25503.3568
EAT (EBT-TAX)
38255.0352
Total Value of equity
402684.6
ROE (EAT/Value)*100
9.5%
Price per share
60
No. of Shares (Total Value/Price)
6711
Share to repurchase (10000-6711)
3289 Shares
Thanks
EBIT
100000
Interest
12000
Ebt
88000
Tax
35200
EAT
52800
Share
10000
Price
60
Value
600000
ROE (EAT/Value)*100
8.8%
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