Edelman enterprises is an all-equity firm with 500000, Ask an Expert

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Edelman Enterprises is an all-equity firm with 500,000 shares outstanding. The company's EBIT is $4,000,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share (EPS) equals its dividends per share (DPS). The company's tax rate is 40%.

The company is considering issuing $4,000,000 worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated YTM of 6.5%. The risk-free rate is 2.75%, and the market risk premium is 6%. The company's beta is currently 0.95, but investment bankers say the beta will rise to 1.04 if the recapitalization occurs.

Assume that the shares are repurchased at a price equal to the stock market price prior to the recapitalization. What would be the company's stock price following the recapitalization?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92424930

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