Lowell Inc. has no debt and its financial position is given by the following data: Assets (book =...

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Finance

Lowell Inc. has no debt and its financial position is givenby
the following data:

Assets (book = market) $3,000,000
EBIT $500,000
Cost of equity (Ks) 10%
Stock price (P0) $15
Shares outstanding n0 200,000
Tax rate T 40%

The firm is considering selling bonds and simultaneously
repurchasing some of its stock. It if moves to capitalstructure
with 30 percent debt based on market values, its cost ofequity,
Ks, will increase to 11 percent to reflect the increasedrisk.
Bonds can be sold at a cost (Kd) of 7 percent. Lowell Inc. isa
no-growth firm. Hence, all its earnings are paid out as
dividends, and earnings are exceptionally constant over time.

a. What would be the new WACC?
b. What effect would this use of leverage have on the value ofthe
firm (Va)?
c. What would be Lowell Inc.’s stock price?
d. What happens to the firm’s earnings per share after the
recapitalization?

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Lowell Inc. has no debt and its financial position is givenbythe following data:Assets (book = market) $3,000,000EBIT $500,000Cost of equity (Ks) 10%Stock price (P0) $15Shares outstanding n0 200,000Tax rate T 40%The firm is considering selling bonds and simultaneouslyrepurchasing some of its stock. It if moves to capitalstructurewith 30 percent debt based on market values, its cost ofequity,Ks, will increase to 11 percent to reflect the increasedrisk.Bonds can be sold at a cost (Kd) of 7 percent. Lowell Inc. isano-growth firm. Hence, all its earnings are paid out asdividends, and earnings are exceptionally constant over time.a. What would be the new WACC?b. What effect would this use of leverage have on the value ofthefirm (Va)?c. What would be Lowell Inc.’s stock price?d. What happens to the firm’s earnings per share after therecapitalization?