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Typology: Summaries
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16.3 Debt and Taxes
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16.5: Optimal Capital Structure: The Tradeoff Theory
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Andris Industries currently has no debt, Revenue of $14.8 million and Operating Expenses of $9. million. The tax rate is 30%. The risk-free rate is 5%, the market risk premium is 6%, and Adris's beta is 0.6. If Andris plans to add $8 million of permanent debt with an interest rate of 7.1% and use the money to repurchase shares, what is the levered value of the company?
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Realistic Co. has no debt and 8.6 million shares priced at $25/share. Their tax rate is 30%. Realistic announces they are going to borrow $80 million of perpetual debt at 7.5% interest and use the money to repurchase shares, what will the new share price be after the repurchase?
a. What is Realistic’s unlevered value, V (^) U?
b. Draw Realistic’s balance sheet after they issue the debt but before the share repurchase
c. If Realistic repurchases shares at the current price, how many shares will be outstanding after the repurchase?
c. What will Realistic’s share price be after the repurchase?
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Material Bank, Inc. is currently 100% Equity financed, with 400,000 shares outstanding and a price of $20/share. Revenue is $5 million, with a 30% EBIT margin and a 20% tax rate.
a) What is Material’s EPS?
Material issues $2 million of debt with a 10% interest rate and uses the money to repurchase shares of equity at the current share price.
b) What is the Material's EPS (earnings per share) after they issue the debt?
