1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Likurg_2 [28]
3 years ago
5

The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coup

on rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current cost of equity is 8.8 percent, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.
1. What is AJC's current total market value and weighted average cost of capital?
2. The firm is considering moving to a capital structure that is comprised of 40 percent debt and 60 percent equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 7 percent, while the required rate of return on equity would increase to 9.5 percent. If this plan were carried out, what would be AJC's new WACC and total value?
3. Now assume that AJC is considering changing from its original capital structure to a new capital structure with 50 percent debt and 50 percent equity. If it makes this change, its resulting market value would be $820,000. What would be its new stock price per share?
4. Now assume that AJC is considering changing from its original capital structure to a new capital structure that results in a stock price of $64 per share. The resulting capital structure would have a $336,000 total market value of equity and $504,000 market value of debt. How many shares would AJC repurchase in the recapitalization?
Business
1 answer:
o-na [289]3 years ago
3 0

Answer:

  1. current market value = $800000, WACC = 7.5%
  2. new WACC = 7.38%, Total value of firm = $ 813,008.13
  3. stock price per share = $62.00
  4. 4750 shares

Explanation:

1) Calculate AJC's current total market value and weighted average cost of capital

current market value = value of equity + value of debt

                      =  ( 10000 * $60 ) + $200000

                      =  $800000

Weighted average cost of capital = ( weight of equity * cost of equity ) + ( weight of debt * cost of debt * ( 1 - tax rate )

= (75% * 8.8% ) + (25% * 6% * 0.6  ) = 7.5%

2) what would be AJC's new WACC and total value

WACC =  ( weight of equity * cost of equity ) + ( weight of debt * cost of debt * ( 1 - tax rate )

= ( 60% * 9.5% ) + ( 40% * 7% * 0.6 )  = 7.38%

Total value of the firm =

= ( Cash flow after tax / WACC )

= (( 100000 * ( 1-40%)) / 7.38%

= 100000 * 0.6 / 7.38%   = $ 813,008.13

3) Calculate the new stock price per share

new stock price = ( value of equity + change in debt ) /  original number of outstanding shares

value of equity = weight of equity * firm value

change in debt =( weight of debt * firm value ) - initial debt value

Hence new stock price =

( 50% *$820000) + (( 50% * $820000)- $200000)) / 10000

= $62.00

4) calculate how many shares AJC  would repurchase in the recapitalization

= original shares - Remaining shares

= 10000 - 5250 = 4750 shares

while ;

Remaining shares = value of equity / stock price = $336000 / $64 = 5250

original shares = 10000

                       

You might be interested in
Net credit sales for Winner Company are $100,000 for the year. The Accounts Receivable account had a balance of $15,000 at the b
Valentin [98]

Answer:

Receivables turnover ratio = 5

Explanation:

Receivables turnover ratio = Net Credit Sales / Average accounts receivable

Receivables turnover ratio = $100,000/$20,000

Receivables turnover ratio = 5

Average accounts receivable = (Beginning Account Receivable + Ending Account Receivable) /2

Average accounts receivable = ($15,000+$25,00)/2

Average accounts receivable = $40,000/2

Average accounts receivable = $20,000

6 0
3 years ago
Ken Young and Kim Sherwood organized Reader Direct as a corporation; each contributed $49,000 cash to start the business and rec
Keith_Richards [23]
English please

Reason: thats too freaking much .
8 0
2 years ago
Assume the factory is currently producing 40 chairs and 30 tables and an order comes in for 5 more tables . What is the opportun
aleksklad [387]

Explanation:

I dont really know. You can ask the tutors tho.

5 0
3 years ago
The February contribution format income statement of XYZ Corporation appears below: Sales $ 169,500 Variable expenses 96,000 Con
Liono4ka [1.6K]

Answer:

degree of operating leverage= 4.742

Explanation:

Giving the following information:

Contribution margin 73,500

Net operating income $ 15,500

<u>To calculate the degree of operational leverage, we need to use the following formula:</u>

degree of operating leverage= Total contribution margin / operating income

degree of operating leverage= 73,500 / 15,500

degree of operating leverage= 4.742

4 0
2 years ago
The main safety hazard created by engine exhaust is
hjlf
I think the answer would be c
7 0
3 years ago
Other questions:
  • We call the 10 / 30 rule
    14·1 answer
  • Sheri, a socialite, received bad publicity for her recent choice of evening wear. As a result, she decided to change designers.
    11·1 answer
  • In our class discussion of Cultural Pollution, we heard an example of provocative ads for Clearasil that upset come parents. In
    7·1 answer
  • Riley Company promises to pay Janet Anderson or her estate $150,000 per year for the next 10 years, even if she leaves the compa
    12·1 answer
  • When a multinational firm decides to sell its products abroad, one of the risks the firm faces is that the government of the for
    13·1 answer
  • How many courses do you need to finish a major?
    14·1 answer
  • (CRM) system uses customer contact information for targeted _____. a. management b. inventory control c. marketing d. budgeting
    15·1 answer
  • Kray Incorporated, which produces a single product, has provided the following data for its most recent month of operations: Num
    9·1 answer
  • What is the opposite of the opposite of left???<br> if you get it fight you get brainliest!!!!
    10·2 answers
  • During the year, Hamlet Inc. paid $22,000 to have bond certificates printed and engraved, paid $170,000 in legal fees, paid $9,0
    5·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!