Problem on optimal capital structure

XYZ Company has debt/assets ratio 50%, that is too high and it must be at 45% to be optimal. This debt reduction must also reduce the bankruptcy costs by $30 million. At present, XYZ has 5 million shares of common stock selling at $50 each. The tax rate of XYZ is 30%. How many shares of stock must the company sell, and buy back bonds from the proceeds, to achieve its optimal capital structure?

View Complete Question

Comments & Conversion

Expert

Verified

Given,
Value of equity = 5 million*$50 = $250 million
Debt/assets ratio = 50%
Hence value of debt = $250 million
Value of Altoona Company = $500 million
Value of firm after recapitalization, V = 500 – 0.45*V*.3 + 43.35
1.135 V = 543.35
Value of firm = 478.72 million
Value of equity = 263.3 million
Number of shares = 5.266 million
Hence 265,900 shares must be issued.

Related Questions in Corporate Finance

Q : Finance A middle income worker, with a

A middle income worker, with a dependent spouse older than the normal retirement age, retired in January 2004. In the year prior to retirement, her gross monthly earnings were $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her

Q : Is this better to repurchase shares or

Assuming a company needs to distribute money to shareholders of it, is this better to repurchase shares or to distribute dividends?

Q : Determine the future value What would

What would the future value after 5 years of $100 be at 10% compound interest?

Q : Portfolio return probability XY Company

XY Company has made a portfolio of such three securities: The correlation coeffic

Q : Problem on sales collections The 2010

The 2010 income statements of Leggett and Platt, inc. reports net sales of $4,076.1 million in 2010 and $4,250 million in 2009. The balance sheet reports accounts and other receivables, net of $550.5 million at December 31, 2010 and $640.2 million at December 31, 2009

Q : Calculated betas when they give

Calculated betas give different information if they are acquired by using weekly, monthly or daily data.

Q : Data Case Please assist with the

Please assist with the attached Data Case assignment

Q : Problem on leasing Johnathan Lewis is

Johnathan Lewis is looking into the possibility of buying several coin-operated vending machines and put them in local hospitals. Each machine costs $2000, that he will depreciate on a straight-line basis over 8 years. The machine will dispense soft-drink cans at 75 c

Q : Is ROE a correct measurement of return

The ROE is the ratio among net income and Shareholders’ equity. The meaning of Return on Equity is return to shareholders. Therefore, is ROE a correct measurement of the return to shareholders?

Q : Types of agency Types of agency :

Types of agency: Specific types of Agency include:A) Auctioneers: Are an agent of vendor until the fall of the hammer when they become an agent for the purchaser.B)

Discover Q & A

Leading Solution Library

Avail More Than 1459427 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads

No hassle, Instant Access

Start Discovering

18,76,764

1961290
Asked

3,689

Active Tutors

1459427

Questions
Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment