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Currently, the firm is all equity funded with 1,000,000 shares valued at $9 per share and the required return on equity is 7.22%. Income tax rate is 35%. Your banker has indicated that the following leverage restructurings are possible:
Number of shares 850,000 700,000 550,000
Debt Leverage 15.00% 30.00% 45.00%
Interest 7.50% 8.00% 8.50%
ROE 11.00% 12.00% 13.00%
1) Estimate the share prices for the following debt restructures 15%, 30%, and, 45%, respectively:
A $6.07; $6.25; $5.96
B $5.96; $6.25; $6.07
C $6.25; $6.07; $5.96
D $5.96; $6.07; $6.25
E $6.07; $5.96; $6.25
2) Estimate which two debt restructures maximize firm value.
A 30%; 45%
B 15%; 30%
C 0%; 15%
D 45%; 0%
E 0%; 30%
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