Question

Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm's debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $3.3 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.32 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm's equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) d. What is the expected return on the firm's equity after the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Before announcement After announcement b. Expected return Expected return d. Expected return

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins E AutoSum - Cut AS Wrap Text Calibri 11 General E Copy Fill Sort & Find & Filter Select Merge & Center Paste в IU* +.0 .00 .00 0 Conditional Format Cell Insert Delete Format % Format Painter Clear Formatting as Table Styles Editing Clipboard Font Alignment Number Styles Cells fr GJ408 Formula Bar TM GU GQ GI GJ GT GK GL GN GO GP GR GS 394 395 396 REFI LOCOMOTIVE WHEN TAXES ARE ABSENT 397 a 398 VALUE OF LEVERED FIRM = VALUE OF UNLEVERED FIRM 399 IF DEBT-EQUITY RATIO = 30% AND DEBT = 3300000 VALUE OF EQUITY = 3300000/30% = 400 11000000 401 VALUE OF FIRM = VALUE OF EQUITY+VALUE OF DEBT 402 VALUE OF FIRM 110000003300000 = 403 14300000 404 405 VALUE OF FIRM DOES NOT CHANGE WHEN TAXES ARE NOT THERE SO VALUE OF FIRM WILL BE SAME BEFORE AND AFTER REPURCHASE ANNOUNCEMENT 406 407 408 Before 409 14300000 After 410 14300000 411 412 loan with points LOCK BOX profit margin EXPO s2 $3 S4 CAP STRU VALUE DILUTION DOLLAR COST AVG NPER APR CPI STATE s6 s7 $8 ear FVA pva Rea erences 130% WA 10:57 ENG 20-11-2019

PV, FV, ANNUITY (Autosaved) Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins E AutoSum - Cut AC Wrap Text Calibri 11 General E Copy Fill Sort & Find & Filter Select Merge & Center Paste в IU* Conditional Format Cell Insert Delete Format % Format Painter Clear Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox GM412 GQ GI GJ GK GL GM GN GO GP GR GS GT GU 412 b 413 EBIT = 1320000 297000 [3300000 X 9%] 414 INTEREST = ЕBT D 1023000 415 TAXES = 416 0 417 NET INCOME = 1023000 418 419 [1023000/11000000] RETURN ON EQUITY BEFORE REPURCHASE 9.30% [NET INCOME/VALUE OF EQUITY] ke 420 421 422 EXPECTED RETURN ON EQUITY FOR |UNLEVERED FIRM с 423 AS THERE ARE NOT TAXES, THE VALUE OF UNLEVERED FIRM = VALUE OF LEVERED FIRM 1320000/14300000= ROE= 9.23% [k0] 424 SO 425 d AFTER REPURCHASE PLAN 426 ko +(ko-kd)(D/S) 9.23%+(9.23%-9%) (0.5) ke 427 ke = 428 ke 9.35% 429 430 loan with points LOCK BOX NPER APR CPI DOLLAR COST AVG ear FVA profit margin CAP STRU VALUE EXPO s2 s3 STATE S8 DILUTION pva s7 S9 erences 130% W 11:03 ENG 20-11-2019