The Rivoli Company has no debt outstanding and its financial position is given by the following...

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The Rivoli Company has no debt outstanding and its financialposition is given by the following data: Market value of Assets$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Taxrate 35% The firm is considering selling bonds and simultaneouslyrepurchasing some of its stock. If it moves to a capital structurewith 40% debt based on market values, the bonds can be sold at acost, rd, of 8%. Rivoli is a no-growth firm and all of its earningsare paid out as dividends.
a. What is Rivoli’s current cost of equity?
b. If the risk free rate is 3 percent and the market riskpremium is 5 percent, what is Rivoli’s unlevered beta?
c. What is the levered beta at the new capital structure of 40percent debt?
d. What is the new cost of equity under the capital structurefinanced with 40 percent debt?
e. What is its new weighted average cost of capital?
f. What is the new total corporate value of Rivoli?
g. What is the new stock price?
h. How many shares remain outstanding after therecapitalization?

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4.1 Ratings (822 Votes)

a EBIT 1500 less tax 35 525 Net income 975 All income is distributed so dividends 975 No of shares 1000 Dividend per share 0975 Stock price 10 Cost of Equity See Answer

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The Rivoli Company has no debt outstanding and its financialposition is given by the following data: Market value of Assets$10,000 EBIT $ 1,500 Stock price $10 Shares outstanding 1,000 Taxrate 35% The firm is considering selling bonds and simultaneouslyrepurchasing some of its stock. If it moves to a capital structurewith 40% debt based on market values, the bonds can be sold at acost, rd, of 8%. Rivoli is a no-growth firm and all of its earningsare paid out as dividends.a. What is Rivoli’s current cost of equity?b. If the risk free rate is 3 percent and the market riskpremium is 5 percent, what is Rivoli’s unlevered beta?c. What is the levered beta at the new capital structure of 40percent debt?d. What is the new cost of equity under the capital structurefinanced with 40 percent debt?e. What is its new weighted average cost of capital?f. What is the new total corporate value of Rivoli?g. What is the new stock price?h. How many shares remain outstanding after therecapitalization?