a manufacturer of cleaning products, just reported that its main production facility in Hong Kong was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Pantus’ free cash flow by $50 million for the next three years. a) If Pantus has 45 million shares outstanding, weighted average cost of capital of 10% and equity cost of capital of 12%, what change in Pantus’ stock price would you expect upon this announcement? (Assume the value of Pantus’ debt -valued at $75 million- is not affected by the event.)

a manufacturer of cleaning products, just reported that its main production facility in Hong Kong was destroyed in a fire. While the plant was fully insured, the loss of production will decrease Pantus’ free cash flow by $50 million for the next three years. a) If Pantus has 45 million shares outstanding, weighted average cost of capital of 10% and equity cost of capital of 12%, what change in Pantus’ stock price would you expect upon this announcement? (Assume the value of Pantus’ debt -valued at $75 million- is not affected by the event.)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 4P: Value of Equity after Recapitalization Nichols Corporations value of operations is equal to 500...

See similar textbooks

Similar questions

Question: Gibson Co. has a current period cash flow of $1.1 million and pays no dividends. The present value of the company's future cash flows is $15 million. The company is entirely financed with equity and has 600,000 shares outstanding. Assume the dividend tax rate is zero. a. What is the share price of the Gibson stock? b. Suppose the board of directors of Gibson Co. announces its plan to pay out 50 percent of its current cash flow as cash dividends to its shareholders. How can Jeff Miller, who owns 1,000 shares of Gibson stock, achieve a zero payout policy on his own?
J Ĉ If the public expects a corporation to lose $5 per share this quarter and it actually loses $4, which is still the largest loss in the history of the company, what does the efficient market hypothesis predict will happen to the price of the stock when the $4 loss is announced?
Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $181 million at the end of this year and by $63 million at the end of next year. a. If Roybus has 32 million shares outstanding and a weighted average cost of capital of 13.8%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain.
U 1 Omicron Technologies made a before-tax profit of $50 million this year. The firm has no debt and 10 million shares outstanding, with a current market price of $45 per share. Its unlevered cost of capital is 10%. Omicron's board is meeting to decide whether to pay out the entire $50 million as a dividend or to use it to repurchase shares of the firm's stock in the open market. C) Suppose that Omicron's board decides to pay a dividend today. Now assume that Omicron pays corporate taxes of 30%. The marginal tax rate for shareholders is 35%. What is the after-tax dividend and effective tax rate for shareholders: i. Under a classical tax system ii. Under an imputation system (assuming that the dividend is 70% franked)?
Question 7. The market capitalisation of Tesla fell from about $1tr at the beginning of Jan 2022 to about $330bn at the end of Jan 2023 in spite of car deliveries increasing by 40% year on year. Part of the drop was believed to be associated with the fact that Tesla's founder sold a substantial holding of shares in Tesla to fund his acquisition of Twitter. How consistent is this evidence with markets being efficient? Explain.
Q.An unlevered company that has a current value of $1,600,000 is considering borrowing $700,000 and using the borrowed funds to repurchase shares. The company can borrow at 5% and has a cost of equity of 13%. EBIT is expected to remain the same every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. What is the company's EBIT according to M&M Proposition I without taxes?
QUESTION ONE A. Why is the goal of financial management to maximize the current share price of the company's stock and not the future share price? B. Jane Muyaule has been given an opportunity to receive K20,000, six years from now. If she can earn 10% on her investments, what is the most she should pay for this opportunity? C. Explain why a company might issue convertible securities instead of straightforward debt or equity. Also, explain how convertibility affects expected return on investment. D. ZedChem is a pharmaceutical company in Zambia. The company's research department has identified a compound that can cure a common cold without any side effects. Unfortunately, the manufacture of this compound requires the company to invest heavily in a high technology factory which will use a number of new techniques, some of which are unproven. The company will also need to recruit and retain the services of a number of eminent scientists, each of whom is both vital to the project and…
Roybus, Inc., a manufacturer of flash memory, just reported that its main production facility in Taiwan was destroyed in a fire. Although the plant was fully insured, the loss of production will decrease Roybus's free cash flow by $182 million at the end of this year and by $60 million at the end of next year. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) b. Would you expect to be able to sell Roybus stock on hearing this announcement and make a profit? Explain. a. If Roybus has 30 million shares outstanding and a weighted average cost of capital of 12.3%, what change in Roybus's stock price would you expect upon this announcement? (Assume that the value of Roybus's debt is not affected by the event.) The change in price per share would be $ (Round to the nearest cent.)
Assume that company A wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of $21 per share and no debt. A has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $50 million on a permanent basis and they will use the borrowed funds to repurchase outstanding shares. If shareholders are perfectly rational and informed, what will the repurchase price per share be (keep two decimal places and assume that the new borrowing will not have any negative effects)?
Question#01 The Rogers Company is currently in this situation: Sales = 14 million; Variable Cost = 7 million Fixed Cost = 3 million tax rate, T = 35%; value of debt, D = $2 million; k d = 10%; ks = 15%; and Shares of stock outstanding, n = 600,000. The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure? Calculate the Break-even point of the company.
Q.An all-equity company is considering borrowing $10,000,000 and using the borrowed funds to repurchase shares. The company's cost of equity is 9%. EBIT is expected to be $3,600,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. If the company proceeds with the capital restructing, what will be the value of the company according to M&M Proposition I without taxes?
Assume MyPharm Corp. is announcing that one of its licensed medications has been successfully tested to be effective in the treatment of the Corona Virus. As a result, its future free cashflow is expected to increase by EUR 500 mln over the next 3 years. MyPharm has currently 80 mln share outstanding, no debt and a cost of equity of 7%. This news come as a surprise to the market. What should happen to the share price?