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LeverCo is financed entirely by equity. The company generates operating profit equal to $80 million. LeverCO currently trades at an equity value of $900 million. At a tax rate of 25 percent, what is the price-to-earnings multiple for LeverCo? New management decides to increase leverage through a share repurchase. The company issues $400 million in bonds to retire $400 million in equity. If the bonds pay interest at 5 percent, what is the company’s new price-to-earnings ratio? Could you predict the direction the P/E ratio would move without performing this calculation??

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Financial Management, Finance

Category:- Financial Management
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