Group Members : Gaby Noska Z.

17/421745/PEK/23322
Ferryan Nugraha 17/421741/PEK/23318
Ade Sumaristya P 17/421701/PEK/23278

(15-6)
Number of shares repurchased = Debt / P per share
= ($150,000,000) / $7.50
= 20,000,000

NPost = N share – Number of shares repurchased

= 60,000,000 – 20,000,000
= 40,000,000

(15-8)
a- What effect would this use of leverage have on the value of the firm?
Original value of the firm (D = $0):
V=D+S
= 0 + ($15)(200,000)
= $3,000,000.

Original cost of capital:

WACC = wd rd(1-T) + wers
= 0 + (1.0)(10%) = 10%.

With financial leverage (wd=30%):

WACC = wd rd(1-T) + wers
= (0.3)(7%)(1-0.40) + (0.7)(11%)
= 8.96%.

Because growth is zero, the value of the company is:

FCF ( EBIT )(1  T ) ($500,000)(1  0.40)

V=    $3,348,214.286. .
WACC WACC 0.0896
 Increasing the financial leverage by adding $900,000 of debt results in an
increase in the firm’s value from $3,000,000 to $3,348,214.286.

b- What would be the price of Rivoli’s stock?

Using its target capital structure of 30% debt:
D = wd V = 0.30($3,348,214.286) = $1,004,464.286.

Therefore, its debt value of equity is:

S=V–D
= $2,343,750.

The new price per share, P, is:

P = [S + (D – D0)]/n0
= [$2,343,750 + ($1,004,464.286 – 0)]/200,000
= $16.741.

c- What happens to the firm’s EPS after the recapitalization?

The number of shares repurchased, X, is:
X = (D – D0)/P
= $1,004,464.286 / $16.741
= 60,000.256  60,000.

The number of remaining shares, n, is:

n = 200,000 – 60,000
= 140,000.

Initial position:
EPS = [($500,000 – 0)(1-0.40)] / 200,000
= $1.50.

With financial leverage:

EPS = [($500,000 – 0.07($1,004,464.286))(1-0.40)] / 140,000
 = [($500,000 – $70,312.5)(1-0.40)] / 140,000
= $257,812.5 / 140,000 = $1.842.

Thus, by adding debt, the firm increased its EPS by $0.342.

d- The $500,000 EBIT given previously is actually the expected value from the
following probability distribution:

Probability EBIT

0.10 ($100,000)
0.20 200,000
0.40 500,000
0.20 800,000
0.10 1,100,000

Determine the times interest earned ratio for each probability. What is the probability
of not covering the interest payment at the 30% debt level?

EBIT EBIT
30% debt: TIE = = .
I $70,312.5

Probability TIE
0.10 ( 1.42)
0.20 2.84
0.40 7.11
0.20 11.38
0.10 15.64

The interest payment is not covered when TIE < 1.0. The probability of
this occurring is 0.10, or 10 percent.
(15-10)

a. What is BEA’s unlevered beta? Use market value D/S when unlevering
βU = 1.0 – 4% - 9%
= 0.87

b. What are BEA’s new beta and cost of equity if it has 40% debt? - BEA’s new beta
βL=1.218

- BEA’s cost of equity

RsL=RF + βL(RM - RF)
=6% + (1.218)(4%)
=10.872%

c. What are BEA’s WACC and total value of the firm with 40% debt? - BEA’s
WACC
WACC = (9%)(1-0.4)(0.4) + (10.872%)(0.6)
= 8.683%

- BEA’s total value of the firm:

g = 0%
= $103,188,000