River Cruises is all-equity-financed
Question
River Cruises is all-equity-financed.
| Current Data | |||||||||
| Number of shares | 100,000 | ||||||||
| Price per share | $ | 10 | |||||||
| Market value of shares | $ | 1,000,000 | |||||||
| State of the Economy | |||||||||
| Slump | Normal | Boom | |||||||
| Profits before interest | $ | 70,750 | 116,500 | 178,000 |
| Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round “Earnings per share” to 3 decimal places. Enter “Return on shares” as a percent rounded to 2 decimal places.) |
| Outcomes | |||
| Number of shares | |||
| Price per share | $10 | ||
| Market value of shares | $ | ||
| Market value of debt | $ | ||
| State of the Economy | |||
| Slump | Normal | Boom | |
| Profits before interest | $70,750 | $116,500 | $178,000 |
| Interest | $ | $ | $ |
| Equity earnings | $ | $ | $ |
| Earnings per share | $ | $ | $ |
| Return on shares | % | % | % |
| Expected Outcome |
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