The Cramden Bus Company is currently all equity financed, but it is considering a leveraged capital structure, the details of which are presented in the table under the column labeled 'Proposed'.
Assume that the company generates perpetual annual EBIT. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. Assume that taxes are zero. Assume that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons (and yield) of 4%.
If Cramden recapitalizes, it will use the borrowed funds to repurchase (and cancel) shares. Determine both the value of the company and the value of the company's equity if it recapitalizes.
| | Capital Structure | Capital Structure |
| | Current | Proposed |
| EBIT | $115,000 | $115,000 |
| Debt, D | $0 | $690,000 |
| Cost of Debt, kd | | 4% |
| Cost of Equity | 5% | |
◦ Company value: $2,875,000; Equity value: $2,185,000
◦ Company value: $2,875,000; Equity value: $2,875,000
◦ Company value: $2,185,000; Equity value: $2,185,000
◦ Company value: $2,300,000; Equity value: $1,610,000
◦ Company value: $2,300,000; Equity value: $2,990,000
The Stillwater Mining Company
Morris and Company, Sussex Rush-Seated Chairs.
Literacy and Gender Equity
Capital-Biased Technological Change
An organizational specialist is hired as a consultant to a company planning to open a coffee ...
Jia's Fashions recently paid a $2 annual dividend. The company is projecting that its ...