The tivoli company has no debt outstanding and its, Ask an Expert

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The Tivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (book = market) $5,000,000

EBIT $750,000

Cost of equity, rs 10%

Stock price, P0 $10

Shares outstanding, n0 500,000

Tax rate, T (federal-plus-state) 40%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt, based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 6%. Tivoli is a no-growth firm. Hence, all its earnings are paid out as dividends, and earnings are expectationally constant over time.

What would the value of the firm be after this debt-for-stock restructuring of the firm is completed?

What would be the price of Tivoli's stock after this debt-for-stock restructuring of the firm is completed?

What will be the firm's earnings per share after this debt-for-stock restructuring of the firm is completed?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9395988

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