River Cruises is all-equity-financed. Suppose it now issues $250,000 of debt at

Question

River Cruises is all-equity-financed.

Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round "Earnings per share" to 3 decimal places. Enter "Return on shares" as a percent rounded to 2 decimal places.)

Current Data Number of shares 100,000 Price per share $ 10 Market value of shares $ 1,000,000 State of the Economy Slump Normal Boom Profits before interest $ 80,500 136,000 197,500

Explanation / Answer

Outcomes Number of shares 75,000 =100,000 - 25,000 Price per share 10 Market value of shares 750000 =75,000 *10 Market value of debt 2,50,000 State of the Economy Slump Normal Boom Profits before interest 80,500 1,36,000 1,97,500 Interest 25000 25000 25000 Equity earnings 55,500 1,11,000 1,72,500 Earnings per share 0.740 1.480 2.300 Return on shares 7.40% 14.80% % 23.00%

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