1. Sardothien Enterprises announces a leverage recapitalization. The new financing is not expected to affect operations....

Transcribed Image Text:

1. Sardothien Enterprises announces a leverage recapitalization. The new financing is not expected to affect operations. The company has no current growth opportunities and pays out 100% of its earnings which are expected to remain constant as dividends. New debt will be issued, and the proceeds will be used to repurchase stock. The number of shares repurchased will be equal to the amount of debt issued divided by price per share. Sardothien Enterprises has $20,000,000 in total assets. The company currently has no debt and a beta of 1.25. The risk-free rate is 4.5% and the market risk premium is 6%. Sardothien Enterprises has a marginal tax rate of 20%. EBIT is $3,000,000 and they have 500,000 shares outstanding. The chart shows the expected cost of debt at each debt level. Bond D/A Cost of Rating Ratio Debt AAA 0 0% AA 10% 6% A 20% 8% BBB 30% 11% BB 50% 15% a. What is the current price per share? b. Determine the amount of debt at each bond rating. C. Find the firm's WACC and stock price at each debt level. d. How much debt must the firm issue to be at their optimal capital structure? e. How did you determine the firm's optimal capital structure? At the optimal capital structure, what is the firm's EPS? 1. Sardothien Enterprises announces a leverage recapitalization. The new financing is not expected to affect operations. The company has no current growth opportunities and pays out 100% of its earnings which are expected to remain constant as dividends. New debt will be issued, and the proceeds will be used to repurchase stock. The number of shares repurchased will be equal to the amount of debt issued divided by price per share. Sardothien Enterprises has $20,000,000 in total assets. The company currently has no debt and a beta of 1.25. The risk-free rate is 4.5% and the market risk premium is 6%. Sardothien Enterprises has a marginal tax rate of 20%. EBIT is $3,000,000 and they have 500,000 shares outstanding. The chart shows the expected cost of debt at each debt level. Bond D/A Cost of Rating Ratio Debt AAA 0 0% AA 10% 6% A 20% 8% BBB 30% 11% BB 50% 15% a. What is the current price per share? b. Determine the amount of debt at each bond rating. C. Find the firm's WACC and stock price at each debt level. d. How much debt must the firm issue to be at their optimal capital structure? e. How did you determine the firm's optimal capital structure? At the optimal capital structure, what is the firm's EPS?