Hamming & Heim Corp's capital of $3,000,000 is currently 100% equity. For the coming year, they are forecasting that earnings before interest and tax (EBIT)will be $1,240,000. The firm's stock is selling at its book value of $12 per share.
Hamming & Heim is considering restructuring capital by buying back its own stock with cash raised by issuing debt until it reaches a capital structure that's 40% debt. The firm will pay 10% interest on any debt issued for this purpose. Assume there is no change in EBIT as a result of the capital structure change and that the tax rate is 40%.
a. How many shares of stock does Hamming & Heim need to repurchase in order to achieve the target capital structure of 40% debt and 60% equity?
b. What is Hamming & Heim's Degree of Financial Leverage (DFL)after implementing the refinancing plan? (round to the nearest two decimal places)
c. What was Hamming & Heim's Return on Capital Employed (ROCE)before implementing the refinancing plan?
d. Will the restructuring improve the firm's ROE and EPS performance?

Question

Hamming & Heim Corp's capital of $3,000,000 is currently 100% equity. For the coming year, they are forecasting that earnings before interest and tax (EBIT)will be $1,240,000. The firm's stock is selling at its book value of $12 per share. 
Hamming & Heim is considering restructuring capital by buying back its own stock with cash raised by issuing debt until it reaches a capital structure that's 40% debt. The firm will pay 10% interest on any debt issued for this purpose. Assume there is no change in EBIT as a result of the capital structure change and that the tax rate is 40%. 
a. How many shares of stock does Hamming & Heim need to repurchase in order to achieve the target capital structure of 40% debt and 60% equity? 
b. What is Hamming & Heim's Degree of Financial Leverage (DFL)after implementing the refinancing plan? (round to the nearest two decimal places)
c. What was Hamming & Heim's Return on Capital Employed (ROCE)before implementing the refinancing plan? 
d. Will the restructuring improve the firm's ROE and EPS performance?

Quizplus · Accepted Answer

The Answer of Hamming & Heim Corp's capital of $3,000,000 is currently 100% equity. For the coming year, they are forecasting that earnings before interest and tax (EBIT)will be $1,240,000. The firm's stock is selling at its book value of $12 per share. 
Hamming & Heim is considering restructuring capital by buying back its own stock with cash raised by issuing debt until it reaches a capital structure that's 40% debt. The firm will pay 10% interest on any debt issued for this purpose. Assume there is no change in EBIT as a result of the capital structure change and that the tax rate is 40%. 
a. How many shares of stock does Hamming & Heim need to repurchase in order to achieve the target capital structure of 40% debt and 60% equity? 
b. What is Hamming & Heim's Degree of Financial Leverage (DFL)after implementing the refinancing plan? (round to the nearest two decimal places)
c. What was Hamming & Heim's Return on Capital Employed (ROCE)before implementing the refinancing plan? 
d. Will the restructuring improve the firm's ROE and EPS performance?

Hamming & Heim Corp's Capital of $3,000,000 Is Currently 100