3. Ms. Guided, the CFO of Finn Corporation, read an article in the WSJ that said...

 

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3. Ms. Guided, the CFO of Finn Corporation, read an article in the WSJ that said investors prefer stocks with high earnings per share (EPS). She decides to give the investors what they demand by issuing debt and using all the proceeds to repurchase shares. Finn Corp currently has 5M shares outstanding and a market capitalization of $30M, and risk free debt worth $5M which is rolled over every year. Finn will generate an expected project cash flow of $3M next year (before interest), with these cash flows growing at a rate of 1% per year thereafter. Assume a frictionless M&M world, and a risk free rate of 3% and a market risk premium of 5%. a. What is the expected return on assets before the restructuring? b. What is the expected return on equity before the restructuring? What is the expected return on debt before restructuring? C. d. What is the expected EPS next year if there is not a restructuring? e. If Ms. Guided decides to increase Finn's debt level by $6M in order to make immediate share repurchases, what is the expected EPS next year? Assume that after this increase in debt, the debt cost of capital for all debt increases to 3.5%. What is the expected return on equity after the restructuring? What is the P/E ratio before and after the restructuring? Bonus question: Suppose Ms. Guided decided not to restructure at all. How many years would she have to wait until Finn's EPS exceeds the level that she would achieve next year with the restructuring? (Hint: once you have a simplified equation, you might want to use an equation solver or simply "guess and check" to find the number of years.) f. g. h. 3. Ms. Guided, the CFO of Finn Corporation, read an article in the WSJ that said investors prefer stocks with high earnings per share (EPS). She decides to give the investors what they demand by issuing debt and using all the proceeds to repurchase shares. Finn Corp currently has 5M shares outstanding and a market capitalization of $30M, and risk free debt worth $5M which is rolled over every year. Finn will generate an expected project cash flow of $3M next year (before interest), with these cash flows growing at a rate of 1% per year thereafter. Assume a frictionless M&M world, and a risk free rate of 3% and a market risk premium of 5%. a. What is the expected return on assets before the restructuring? b. What is the expected return on equity before the restructuring? What is the expected return on debt before restructuring? C. d. What is the expected EPS next year if there is not a restructuring? e. If Ms. Guided decides to increase Finn's debt level by $6M in order to make immediate share repurchases, what is the expected EPS next year? Assume that after this increase in debt, the debt cost of capital for all debt increases to 3.5%. What is the expected return on equity after the restructuring? What is the P/E ratio before and after the restructuring? Bonus question: Suppose Ms. Guided decided not to restructure at all. How many years would she have to wait until Finn's EPS exceeds the level that she would achieve next year with the restructuring? (Hint: once you have a simplified equation, you might want to use an equation solver or simply "guess and check" to find the number of years.) f. g. h.