Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal dividends per share (DPS), and its tax rate is 40%. The company is considering issuing $4,500,000 of 9.00% bonds and using the proceeds to repurchase stock. The risk-free rate is 4.5%, the market risk premium is 5.0%, and the firm's beta is currently 1.10. However, the CFO believes the beta would rise to 1.30 if the recapitalization occurs. Assuming the shares could be repurchased at the price that existed prior to the recapitalization, what would the price per share be following the recapitalization? (Hint: P0 = EPS/rs because EPS = DPS.)
A. $34.52
B. $27.84
C. $21.44
D. $28.12
E. $29.51
Answer: B
You might also like to view...
Cases before the full commission of the Federal Trade Commission can be appealed to the U.S. Court of Appeals and even to the U.S. Supreme Court
Indicate whether the statement is true or false
Deficient products are products ________
A) that have neither immediate appeal nor long-run benefits B) that give high immediate satisfaction but only hurt consumers in the long run C) that have low appeal but may benefit consumers in the long run D) that are either unsafe or inferior E) in the decline stage of the product life cycle
The Enron financial scandal increased uncertainty about the quality of accounting information and as a result, increased required return on investment in stocks
Indicate whether the statement is true or false
Senator Hotair, Mary's uncle, has become disgusted with Joe. At a press conference the Senator attacks Joe, calling him names, saying he is a disgusting person and must be crazy. This is printed widely. Joe wants to sue the Senator for defamation. He can sue:
a. and possibly win b. but will lose because the Senator is a public figure c. but will lose because Joe is a private figure, so public comments about him are irrelevant d. but will lose because members of Congress have immunity from suits for their statements e. but will lose because of the free speech and debate clause of the Constitution