SNC Inc., an unlevered firm, has 1 million shares outstanding, each trading at $25. The firm...

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SNC Inc., an unlevered firm, has 1 million shares outstanding,each trading at $25. The firm is thinking of changing its capitalstructure by issuing $10 million of debt at 10% and will use theproceeds to repurchase shares. Assume the bank pays an interestrate of 10%.
Assume that SNC Inc. decides to convert to the proposed capitalstructure. Jane, a shareholder of the firm, owns 15,000 shares. Sheprefers the cash flows she was receiving under the all-equitycapital structure. If the EPS of the firm under the proposedcapital structure is $5.50, what will be Jane’s cash flow assumingshe does homemade leverage to achieve the all-equity cash flow?Assume the corporate tax rate is 0%.
Answer is $64500 – need an in-depthsolution.
Now assume that SNC Inc. faces a corporate tax rate of 40%.What would be the stock price of SNC Inc. after the firm hasannounced the debt issue to the market but before the shares arerepurchased?
Answer is $29 – need an in-depth solution.

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4.4 Ratings (554 Votes)

a Under the proposed capital structure Value of 1 share 25 No of shares to be repurchased 10 million25 400 000 out of the existing 1000000 shares ie40 shares will be repurchased 600000 shares will remain outstanding If the capital structure changes the total operating income will not See Answer

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SNC Inc., an unlevered firm, has 1 million shares outstanding,each trading at $25. The firm is thinking of changing its capitalstructure by issuing $10 million of debt at 10% and will use theproceeds to repurchase shares. Assume the bank pays an interestrate of 10%.Assume that SNC Inc. decides to convert to the proposed capitalstructure. Jane, a shareholder of the firm, owns 15,000 shares. Sheprefers the cash flows she was receiving under the all-equitycapital structure. If the EPS of the firm under the proposedcapital structure is $5.50, what will be Jane’s cash flow assumingshe does homemade leverage to achieve the all-equity cash flow?Assume the corporate tax rate is 0%.Answer is $64500 – need an in-depthsolution.Now assume that SNC Inc. faces a corporate tax rate of 40%.What would be the stock price of SNC Inc. after the firm hasannounced the debt issue to the market but before the shares arerepurchased?Answer is $29 – need an in-depth solution.