D 1 Repurchasing Shares to Change Capital Structure 2 This is an example of a firm...
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D 1 Repurchasing Shares to Change Capital Structure 2 This is an example of a firm with 100% equity, A = E. Firm currently has 100,000 shares of 3 common stock outstanding, with a price of $20. The EBIT for the firm will be $500,000. The 4 marginal tax rate for the firm is 40%. All earnings are paid out in the form of dividends. 5 Therefore, there is no growth for the firm and the stock price is determined by DPS/ks. 6 The firm must borrow in increments of $250,000, with a maximum debt level of $1,000,000. 7 The increases to the cost of debt and the cost of equity increases with debt is as follows: 8 Amount Borrowed kd ks 15.0% 9 15.5% 16.5% 18.0% 20.0% 10 11 22 23 24 25 A 36 37 38 39 40 41 B 12 13 14 15 Sell bonds and repurchase common stock with proceeds. 16 How many shares can we repurchase with issuing $250,000 of debt? 17 18 19 20 With debt EBIT will now be reduced by interest expense and taxes will also be reduced. Number of Shares Repurchased = 21 12,500 25,000 37,500 EBIT Interest What is the New EPS? LA LA LA LA LA $ $ $ $ 250,000 $ 500,000 $ 750,000 $ 1,000,000 $ $250,000 / $20 = 26 27 28 29 The issuance of debt changes EPS and ks (the required rate of return for investors). 30 What is the New price of stock? 31 32 33 34 35 What is the optimal capital structure? Debt Level Shares Out Book Equity $ 100,000 $2,000,000 $ 250,000 500,000 750,000 1,000,000 EBT Taxes @40% NI EPS = E DPS = Stock Price 10.0% 11.0% 13.0% 16.0% F kd $ DPS 3.00 H ks 15.0% $ 50,000 P 20.00 I J WACC D/E 15.0% 0.0 D 1 Repurchasing Shares to Change Capital Structure 2 This is an example of a firm with 100% equity, A = E. Firm currently has 100,000 shares of 3 common stock outstanding, with a price of $20. The EBIT for the firm will be $500,000. The 4 marginal tax rate for the firm is 40%. All earnings are paid out in the form of dividends. 5 Therefore, there is no growth for the firm and the stock price is determined by DPS/ks. 6 The firm must borrow in increments of $250,000, with a maximum debt level of $1,000,000. 7 The increases to the cost of debt and the cost of equity increases with debt is as follows: 8 Amount Borrowed kd ks 15.0% 9 15.5% 16.5% 18.0% 20.0% 10 11 22 23 24 25 A 36 37 38 39 40 41 B 12 13 14 15 Sell bonds and repurchase common stock with proceeds. 16 How many shares can we repurchase with issuing $250,000 of debt? 17 18 19 20 With debt EBIT will now be reduced by interest expense and taxes will also be reduced. Number of Shares Repurchased = 21 12,500 25,000 37,500 EBIT Interest What is the New EPS? LA LA LA LA LA $ $ $ $ 250,000 $ 500,000 $ 750,000 $ 1,000,000 $ $250,000 / $20 = 26 27 28 29 The issuance of debt changes EPS and ks (the required rate of return for investors). 30 What is the New price of stock? 31 32 33 34 35 What is the optimal capital structure? Debt Level Shares Out Book Equity $ 100,000 $2,000,000 $ 250,000 500,000 750,000 1,000,000 EBT Taxes @40% NI EPS = E DPS = Stock Price 10.0% 11.0% 13.0% 16.0% F kd $ DPS 3.00 H ks 15.0% $ 50,000 P 20.00 I J WACC D/E 15.0% 0.0
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Related Book For
Quantitative Methods for Business
ISBN: 978-0324651751
11th Edition
Authors: David Anderson, Dennis Sweeney, Thomas Williams, Jeffrey cam
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