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A firm with a return on common equity (ROCE) of 30% has financial leverage of...

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Finance

A firm with a return on common equity (ROCE) of 30% has financial leverage of 37.5% and a net after-tax borrowing cost of 5% on $240 million of net debt

The firm is considering repurchasing $150 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost. What effect will this transaction have on the firms return on common equity if the same level of operating profitability is maintained?

Will this repurchase change the per share intrinsic value of the equity? Why?

Will the normal P/E ratio for this firm change because of this transaction? Why?

Would you expect the earnings-per-share growth rate to change after the repurchase transaction? Why?

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