The price per share of an unlevered firm is $5. EBIT is projected to be $50,000. There are no taxes. T
Posted: Thu Apr 28, 2022 2:00 pm
The price per share of an
unlevered firm is $5. EBIT is
projected to be $50,000. There are
no taxes. The board of the firm is considering a capital
restructuring where they would repurchase outstanding stock by
borrowing $5,000 at a 10% rate. There are 10,000 shares
currently outstanding.
a) Assuming that all profits are
paid out as dividends to
shareholders, what is the EPS
or distributions per share back to
shareholders if the firm remains
unlevered and if the firm
restructures?
b) If you own 10 shares of the unlevered firm but prefer
the distributions of the levered firm, how could you replicate the
payoff of the levered firm yourself? (Provide details on how
much to borrow and how many units of stocks to purchase.
Assume that stocks can be purchased in incremental
amounts)
c) Now suppose the firm levers
up and you have a strong
preference for the safer unlevered
returns. Again, with our 10 shares,
how can you effectively de-lever
and obtain the same payoff as if the firm
were unlevered?
unlevered firm is $5. EBIT is
projected to be $50,000. There are
no taxes. The board of the firm is considering a capital
restructuring where they would repurchase outstanding stock by
borrowing $5,000 at a 10% rate. There are 10,000 shares
currently outstanding.
a) Assuming that all profits are
paid out as dividends to
shareholders, what is the EPS
or distributions per share back to
shareholders if the firm remains
unlevered and if the firm
restructures?
b) If you own 10 shares of the unlevered firm but prefer
the distributions of the levered firm, how could you replicate the
payoff of the levered firm yourself? (Provide details on how
much to borrow and how many units of stocks to purchase.
Assume that stocks can be purchased in incremental
amounts)
c) Now suppose the firm levers
up and you have a strong
preference for the safer unlevered
returns. Again, with our 10 shares,
how can you effectively de-lever
and obtain the same payoff as if the firm
were unlevered?