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$10.00 Petitte Printing - Capital Structure Analysis
- From Business: Finance , Economics: Financial-Markets
- Closed, but you can still post tutorials
- Due on Feb. 05, 2008
- Asked on Jan 26, 2008 at 7:06:15PM
Q:Please See Attached Document:
(Pettit Printing)
Background:
Pettit Printing has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10 % perpetual bonds now selling at par. The company’s EBIT is $13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to $70 million, or decreasing it to $30 million.
If if decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call in its old bonds and replace them with new 8% coupon bonds.
The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence its stock is a zero growth stock. If it increases leverage, Ks will be 16%. If it decreases leverage, Ks will be 13%.
A. What’s is the firm’s cost of equity at present ?
B. Should the firm change its capital structure ?
C. Suppose the tax rate is changed to 34%. This would lower after-tax income and also cause a decline in the price of the stock and the total value of the equity, other things held constant. Calculate the new stock price ( at $50 million of debt )
D. Continue the scenario of Part C above, but now re-examine the question of the optimal amount of debt. Does the tax rate change affect your decision about the optimal use of financial leverage ?
E. Go back to Part B above; that is, assume T=15%. How would your analysis of the capital structure change be modified if the firm’s presently outstanding debt could not be called, and it did not have to be replaced; that is, if the $50 million of 10% debt continued even if the company issued new 12% bonds ?
F. Suppose these probabilities for EBIT exist:
P[EBIT = $ 5 million ] = 0.2
P[EBIT = $15 million ] = 0.6
P[EBIT = $ 25 million] = 0.2
G. Under the assumptions of Part E above, what are the following, assuming an increase in book value of debt to $ 70 million.
a. the expected EPS and ?EPS
b. the expected TIE and ?TIE
Attachments:
BA410-Mod5-Sect3-Chptr13-Prob-13-3-Pettit Prin.doc (26K)
