Selected financial information for the Baltimore & Ohio Railroad Corpo

Selected financial information for the Baltimore & Ohio Railroad Corporation (B&O) is provided in the table below.

B&O is currently all equity financed, but it is considering a leveraged capital structure, details of which are presented in the column labeled ‘Proposed’. Under the proposed capital structure, B&O will use all of the new debt to repurchase (and cancel) shares. How many shares will be left outstanding after the repurchase, if B&O buys shares for $30.00 per share?

Capital Structure Capital Structure
Current Proposed
EBIT $150,000 $150,000
Debt, D 0 $1,500,000
Cost of Debt, N/A 3%
Shares Outstanding 100,000 –
Stock Price $30.00 $30.00

A) 50,000
B) 100,000
C) 75,000
D) 25,000
E) 33,000

ANSWER

A