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DIY Inc. has 125,864 shares outstanding. It currently has a perpetual debt of $245,734 and the...

DIY Inc. has 125,864 shares outstanding. It currently has a perpetual debt of $245,734 and the firm value is $843,740. The company announces that in the near future it will issue an additional $165,143 of perpetual debt. If the firm is in the 0.33 tax bracket, how many shares of stock will be outstanding after the recapitalization?

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Answer #1

Answer:

Value of equity=Value of firm-Value of debt

=$843,740-$245,734

=$598,006

Current market price per share=Value of equity/No. of shares outstanding

=$598,006/125,864

=$4.75

No. of shares that will repurchase=Value of new debt issue/Current market price per share

=$165,143/$4.75

=34,767 shares

Thus,no. of shares of stock outstanding after the recapitalization is;

=125,864-34,767

=91,097 shares

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