The firm is an all-equity firm with assets worth $512,000 and 64,000 shares outstanding. It plans to borrow $120,000 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 $120,000 permanently. If the firm plan to repurchase shares at $9 per share, what is the expected per share value of equity for the leveraged firm? Please show your work.
A) $8 per share
B) $10.45 per share
C) $8.23 per share
D) $8.59 per share
E) Repurchase will not be successful because the firm’s offer is too low.
Correct answer: C) $8.23 per share
All equity firm value (VE) = $512,000
Shares outstanding = 64,000
Tax rate (t) = 21%
Debt Issued (D) = $120,000
Share repurchase price = $9
No. of share repurchased = 120,000/9 = 13,333
According to M&M Proposition 1 with taxes: Value of Leveraged Firm (VL) would be:
Value of Equity in Leveraged Firm(E):
No. of share outstanding after repuchase = 64000-13333 = 50667
Thus,
Expected per share value of equity of leveraged Firm:
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