The firm is an all-equity firm with assets worth $512,000 and 64,000 shares outstanding. It plans to borrow $120,000 and use these funds to repurchase shares. The firm’s marginal corporate tax is 21%, and it plans to keep its outstanding debt equal to $120,000 permanently. If the firm plan to repurchase shares at $9 per share, what is the expected per share value of equity for the leveraged firm? Please show your work.
A) $8 per share B) $10.45 per share C) $8.23 per share D) $8.59 per share E) Repurchase will not be successful because the firm’s offer is too low.
Current share price = asset worth/ number of share
= 512000/64000
= $8
Price before share repurchase = (512000 + 21%of(120000))/64000
= $537200/64000
= $8.394
With $9 as per share price $120000 will give 13,333.33 shares
Thus remaining share will be equal to 64000 - 13333 = 50667
Share price of levered firm = ((512000 + 21%of(120000)) - 120000)/ 50667
= $8.23 per share
Correct answer is option C.
The firm is an all-equity firm with assets worth $512,000 and 64,000 shares outstanding. It plans...
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