Question 3 Payout Policy and Capital Structure The following data are given for a specific company:...

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Question 3 Payout Policy and Capital Structure The following data are given for a specific company: 500 million Number of shares Share price $1. Market value of equity Market value of debt Earnings before interest Cost of debt risk free rate Expected market return Beta of equity • Tax rate $500 million $500 million $60 million (perpetual) 2% 7% 1.6 0% a) Calculate the company's earnings per share (EPS). (2 points) s b) Calculate the company's cost of equity. (1 point) c) Assume the company wants to repurchase 100 million of its outstanding shares (worth $100 million). The transaction is financed through additional debt in the amount of $100 million. Recalculate the EPS and the cost of equity after the transaction, and interpret the result (what can be seen and what it means). (8 points) d) Calculate the Weighted Average Cost of Capital (WACC) before and after the transaction. (2 points) e) What is the signal that the company sends to its shareholders through this transaction? How does this signal differ from one based on dividend payments? (2 points) Question 3 Payout Policy and Capital Structure The following data are given for a specific company: 500 million Number of shares Share price $1. Market value of equity Market value of debt Earnings before interest Cost of debt risk free rate Expected market return Beta of equity • Tax rate $500 million $500 million $60 million (perpetual) 2% 7% 1.6 0% a) Calculate the company's earnings per share (EPS). (2 points) s b) Calculate the company's cost of equity. (1 point) c) Assume the company wants to repurchase 100 million of its outstanding shares (worth $100 million). The transaction is financed through additional debt in the amount of $100 million. Recalculate the EPS and the cost of equity after the transaction, and interpret the result (what can be seen and what it means). (8 points) d) Calculate the Weighted Average Cost of Capital (WACC) before and after the transaction. (2 points) e) What is the signal that the company sends to its shareholders through this transaction? How does this signal differ from one based on dividend payments? (2 points)

Answer rating: 100% (QA)

a To calculate the companys earnings per share EPS you can divide the companys earnings before interest by the number of outstanding shares In this ca... View the full answer