Hazlett's Is an Unlevered Firm with a Total Market Value

question 62

Multiple Choice

Hazlett's is an unlevered firm with a total market value of $280,000 and 10,000 shares of stock outstanding.The firm has expected EBIT of $16,000 if the economy is normal and $19,000 if the economy booms.The firm is considering a bond issue of $42,000 with an attached interest rate of 7.3 percent.The bond proceeds will be used to repurchase shares.The tax rate is 35 percent.What will be the earnings per share after the repurchase if the economy is normal?

• A)$1.27
• B)$0.63
• C)$0.99
• D)$1.05
• E)$1.18

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Definitions:

Residual Dividend Policy

A strategy where a company pays dividends from the residual or leftover equity only after all project capital needs are met.

Dividend Payout Ratios

Dividend payout ratios represent the percentage of a company's earnings paid out to shareholders as dividends, indicating how much money a company returns to shareholders versus retaining it.

High-Growth Firms

Companies that show significantly higher rates of growth in revenue or earnings than the average for their industry or the market as a whole.

Information Content

Information content refers to the degree to which a piece of information can impact an individual's understanding or the market's perception, often used in the context of how financial disclosures affect stock prices.