Question

River Cruises is all-equity-financed.

	Current Data
Number of shares		100,000
Price per share	$	10
Market value of shares	$	1,000,000
	State of the Economy
	Slump			Normal			Boom
Profits before interest	$	72,250			119,500			181,000

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.)

	Outcomes
Number of shares	________
Price per share
Market value of shares	$________
Market value of debt	$________
State of the Economy
	Slump	Normal	Boom
Profits before interest	$72,250	$119,500	$181,000
Interest	$________	$________	$ ________
Equity earnings	$________	$________	$________
Earnings per share	$________	$________	$________
Return on shares	_________ %	_________%	_________ %
Expected outcome

Answer 1

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