Question

chaper 16 & 17

Locomotive 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 $4 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.39 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Enter your answers in dollars, not millions of dollars, e.g, 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, o.g, 32.) Before After 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.) return 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.) Expected return 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.) Expected return References eBook& Resources Worksheet Difficuity: 2 Intermediate MacBook Ai

Answer 1

Solutlon: Before Repurchase Announceme아 Debit-Equity Raho 351. Debit equity Ratio - Delh Equity equi Equity o,ion Value of 14e firm : Delt+equity AF e Reparchase Announte ment: value of he vm announo ll not Charge ts (3.88 Caliculakion of he Expected Reken en keequikn million (EBIT invest) EQuity no 1356x8) o. 28 -10.33%

erefore. perte value of He 13.es millin EBIT1.35 Equity 1.35-(3.6x87.) 13.88 ee oye, Hie Rehurn o