PEARSON Practice: Section 12.4 Save 5 or 7 Score: 3.5 of 7 pts Question Help Set
ID: 2783453 • Letter: P
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PEARSON Practice: Section 12.4 Save 5 or 7 Score: 3.5 of 7 pts Question Help Settings Question 5: Problem 12.L04.25 (similar to) Union Aerospace Corporation (UAC) generates perpetual annual EBIT of $200 (Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year) Wayne Enterprises has 1,300 shares outstanding The stockholders of UAC require a return of 7% Assume mat UAC is intialy all oquity financed it is considering an open market stock repurchase. It plans to buy 20% of as outstanding shares at the price that prevails prior to the repurchase under the all-equily capital structure) The repurchased shares vwill be cancelled It will finance the repurchase by issuing perpotual bonds with a coupon rade (and yield) of 2% Assume that the tax rate is 40% a. What is the value of UAC prior to the repurchase? b. What is the price per share for UAC stock prior to the repurchase? d. WUAC goes ahead with the repurchase, then what is the value of the company after the repurchase is complete? e. What is the stock price after the repurchase is complete? t. What is the required return of stockholders for UAC after the repurchase is complete? 9- What is the WACC for UAC afher the repurchase is complote? (Round to the nearest dollar ) a. The value of uAC prior to the repurchase is Enter you ae anseer box and then cick Check AnswerExplanation / Answer
a) Value of UAC = EBIT x (1 - tax) / Cost of equity
= 200 x (1 - 40%) / 7%
= $1,714
b) Price per share = 1,714 / 1300 = $1.32
c) Face Value of bond = 1.32 x 20% x 1,300 = $343
d) Value of the company = Vu + D x tax = 1,714 + 343 x 40% = 1,851
e) Value of equity = 1,851 - 343 = 1,509
Stock Price = 1,509 / (1,300 x 80%) = $1.45
f) Required return = ru + D/E x (ru - rd) = 7% + 343/1509 x (7% - 2%) = 8.14%
g) WACC = wd x kd x (1 - tax) + we x ke
= 343 / 1851 x 2% x (1 - 40%) + 1509 / 1851 x 8.14%
= 6.85%
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