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Monroe Inc. is an all-equity firm with 500,000 shares outstanding. It has $2,000,000 of EBIT, and EBIT is expected to

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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 0.90. However, the CFO believes the beta would rise to 1.10 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? (P0 = EPS/rs because EPS = DPS.)

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Given data Risk Free Rate 4 5 Market Risk Premium 5 Beta 0 90 Expected Return …View the full answer


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Intermediate Financial Management

Intermediate Financial Management

ISBN: 978-1111021573

10th Edition

Authors: Brigham, Daves

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Question Posted: February 15, 2018 07:50:34
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