Orge is an all-equity firm with 300.000 shares outstanding. It has $3,000,000 of BIT, which is expected to remain consta

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Orge is an all-equity firm with 300.000 shares outstanding. It has $3,000,000 of BIT, which is expected to
remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equal
dividends per shares (PS). Its tax rate is 35%. Let's assume the stock price is $50 before recapitalization.
The company is considering issuing $2,000,000 of 6.0% bonds at par value and using the proceeds to
repurchase stock. The risk-free rate is 4%, the market return is 12.0%, and the CFO believes beta would
rise to 1.2 if the recapitalization occurs.
7.
What is cost of equity ?
A.
13%
B.
18.4%
C.
13.6%
D.
12%
2.
What is number of shares to be purchased?
+ A.
40.000
B.
50.000
C.
30.000
D.
60.000
3.
What is EPS after recapitalization?
A. 5.20
+B. 7.20
C.
810
D. 6.70
What is stock price after recapitalization?
A. 25.94
B
38.23
C. 52.94
D. 59.55
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