Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to a
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Recapitalization A proposed recapitalization plan for Focus Corporation would change its current all-equity capital structure to a leveraged capital structure. The proposal is for Focus to sell $50,000,000 worth of long-term debt at an interest rate of 7.25% and then repurchase as many shares as possible at a price of $20 per share. Focus currently has 5,000,000 shares outstanding and expects EBIT to be $25,000,000 per year in perpetuity. Assume that Focus operates in perfect capital markets and calculate the following:
a. The number of shares outstanding, the per-share price, and the debt-to-equity ratio for Focus if it adopts the proposed recapitalization.
b. The earnings per share (EPS) and the return on equity (ROE) for Focus under the current and proposed capital structures.
c. The EBIT where EPS is the same for both capital structures.
d. The EBIT where EPS is zero for both capital structures.
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a Number of shares repurchased 50000000 20 2500000 shares Number of shares outstanding after repurch...View the full answer
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