PEARSON Practice: Section 12.4 Save Score: 5.5 of 7 pts 5 of 7 Question 5: Probl
ID: 2784160 • Letter: P
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PEARSON Practice: Section 12.4 Save Score: 5.5 of 7 pts 5 of 7 Question 5: Problem 12.LO4.25 (similar to) Question Help Settings 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 Emerprises has 1 300 shares outstanding The stockholders of UAC require a return of 7% Assena that uAC i, initially all-equity financed it is considering an open market stock repurchase. lt plans to buy 20% of its utstand ng shares at the price tat preva s porto me reurehase (under the all-equity capital structure) The repurchased shares will be cancelled. It eill finance the repurchase by issuing perpetual bonds with a coupon rate (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? c. If UAC goes ahead with the repurchase, then what is the face value of the bonds that it will issue d. HUAC 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? f. What is the required retun of stockholders for UAC after the repurchase is complete g. What is the WACC for UAC after the repurchase is complete? a. The value of UAC prior to the repurchase is Round to th nearest dollar.)Explanation / Answer
a.
b. price per share= value/shares outstanding= 1714.29/1300= 1.32 per share
c. face value of bonds issued= Value of firm*20%= 1714.29*20%= 342.86
d. Value of company after repurchase
e. stock price= value of equity/ stock outstading
Stock outstanding= 1300*80%= 1040
Stock price= 1616.33/ 1040= 1.55
f. required return= 7% which is same, value of stock went up.
g. WACC= Weight of equity*required return of equity +weight of debt*interest rate*(1-taxrate)
= 80% *7% +20%*2%*(1-40%) = 5.84%
Ref Particulars Amount A EBIT 200 B Less tax 80.00 C=A-B PAT 120.00 D Required return 7% E=C/D Value 1,714.29Related Questions
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