Question

The firm is an all-equity firm with assets worth $350 million and 100 million shares outstanding. It plans to borrow $100 million 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 $100 million permanently. If the firm manages to repurchase shares at $4 per share, what is the per share value of equity for the leveraged firm?

A) $2.71 per share

B) $3.5 per share

C) $3.61 per share

D) $3.71 per share

E) $4 per share

Answer 1

Value of assets after debt issued = Value of unlevered equity + PV of tax shield

= 350 million + 100 million * 21%

Value of assets after debt issued = $ 371 millions

Value of levered equity = Value of assets - value of debt = $ 371 million - 100 million = $ 271 million

No. of shares after repurchasing = 100 million share - 100/ 4 = 75 million shares

Value per share = Value of equity / No. of shares outstanding = $ 271 million / 75 million shares = 3.613333 per share

per share value of equity for the leveraged firm = $ 3.61 per share

Option C is correct.