Rally, Inc., is an all-equity firm with assets worth $ 21 billion and 66 billion shares outstanding. Rally plans to borrow
$ 8 billion and use funds to repurchase shares. Rally's corporate tax rate is 35 %, and Rally plans to keep its outstanding debt equal to$ 8 billion permanently.
a. Without the increase in leverage, what would be Rally's share price?
b. Suppose Rally offers $ 3.84$ per share to repurchase its shares. Would shareholders sell for this price?
c. Suppose Rally offers $ 4.20 per share, and shareholders tender their shares at this price. What will be Rally's share price after the repurchase?
d. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case?
a. Without the increase in leverage, what would be Rally's share price?
Without the increase in leverage, Rally's share price is $( ) (Round to the nearest cent.)
b. Suppose Rally offers$ 3.84$ per share to repurchase its shares. Would shareholders sell for this price?
The minimum share price they would sell for is$ ( ) (Round to the nearest cent.)
c. Suppose Rally offers $ 4.20per share and shareholders tender their shares at this price. What will be Rally's share price after the repurchase?
If Rally offers $ 4.20 per share, and shareholders tender their shares at this price, the share price after the repurchase will be$( ) (Round to the nearest cent.)
d. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case?
The lowest offer per share is$ ( )(Round to the nearest cent.)
The stock price after repurchase is $( ) (Round to the nearest cent.)
Value of the unlevered firm Vu = 21 billion
Number of shares outstanding (n) = 6 billion
a). Share price = Vu/n = 21/6 = $3.5
b). Before the repurchase, total assets will be
21 + cash from debt + tax shield = 21 + 8 + 35%*8 = 31.8 billion
Equity = 31.8 - 8 = 23.8 billion
Share price = 23.8/6 = $3.97
If Rally offers $3.84 per share then shareholders will not sell for this price.
c). After the repurchase:
Assets = 21 + tax shield = 21 + 35%*8 = 23.8 billion
Equity = 23.8 - 8 = 15.8 billion
Number of shares bought back at $4.20 is 8 billion/4.20 = 1.90 billion
Shares outstanding = 6 - 1.90 = 4.10 billion
Share price (after repurchase) = 15.8 billion/4.10 billion = $3.86
d). As calculated in (b), fair share price is $3.97 per share. This is the lowest for which shareholders can tender their share.
Number of shares bought back = 8 billion/3.97 = 2.02 billion
Shares outstanding = 6 billion - 2.02 billion = 3.98 billion
Equity value = 15.8 billion
Share price = 15.8 billion/3.98 billion = $3.97
Note: There appears to be a typo in the question (number of shares 66 billion) which was not making sense with the calculations. So, number of shares has been taken as 6 billion. In case, this number changes, the subsequent answers will change as well.
Rally, Inc., is an all-equity firm with assets worth $ 21 billion and 66 billion shares outstan...
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