Question

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in perpetuity. The current required return on the firm’s equity is 12 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.26 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $40.4 million of perpetual 6.3 percent debt and use the proceeds to buy back shares. |

a-1. |
Calculate the value of the company before the recapitalization
plan is announced. |

a-2. |
What is the price per share? (Do not round intermediate
calculations and round your answer to 2 decimal places, e.g.,
32.16.) |

b-1. |
Use the APV method to calculate the company value after the
recapitalization plan is announced. (Do not round
intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to the nearest whole number, e.g.,
1,234,567.) |

b-2. |
What is the price per share after the recapitalization is
announced? (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.) |

c-1. |
How many shares will be repurchased? (Do not round
intermediate calculations and enter your answer in dollars, not
millions of dollars, rounded to the nearest whole number, e.g.,
1,234,567.) |

c-2. |
What is the price per share after the recapitalization and
repurchase? (Do not round intermediate calculations and
round your answer to 2 decimal places, e.g., 32.16.) |

d. |
Use the flow to equity method to calculate the value of the
company’s equity after the recapitalization. |

Answer #1

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