The company, Lera expects an annual cash flow EBIT of 200 mill without growth in the foreseeable future. The company´s cost of capital (required return on assets) is 10%, the tax rate is 25% and the company issued 200 mill. shares, all of which are traded on the market. The board of Lera is currently considering a loan to refinance by issuing 900 mill. in debt at a 5% interest rate pr. year. The amount will be used to repurchase shares. The loan is instalment-free and the company only pays the interest and the end of each year.
Assume (1) perpetual cash flows and (2) a well-functioning capital market where the company´s tax rate is taken into account in the value calculation made.
Questions:
1) What is currently the market value of Lera, as an unlevered (equity only) company?
2) What will the company´s market value immediately after the announcement of the refinancing plans?
3) What will be the market value per. Share immediately after the announcement of the refinancing plans?
In the absence of other news that affects the share price, what is the market value per. Share after you receive the loan?
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