Homework Answers
a. value of one share without debt: 100million/20million = $5.00
no of stocks that needs to be purachased for $40million = 40/5 = 8 million stocks.
using Modigliani miller proposition I with taxes, value of levered company = value of unlevered company + t*D where t is tax rate and D is debt
hence new value for the company = 100 + 0.35*40 = 114
hence the min repurchase share value for this 8 million would be 114/20 = $5.7
b. the new value of the company = 114
remaining stocks for the company = 12 million
hence new stock price would be = 114/12 = $9.5
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