Question

Kurz Manufacturing is currently an? all-equity firm with

29

million shares outstanding and a stock price of

$ 7.00

per share. Although investors currently expect Kurz to remain an? all-equity firm, Kurz plans to announce that it will borrow

$ 40

million and use the funds to repurchase shares. Kurz will pay interest only on this? debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a

30 %

corporate tax rate.??

a. What is the market value of? Kurz's existing assets before the? announcement?

b. What is the market value of? Kurz's assets? (including any tax? shields) just after the debt is? issued, but before the shares are? repurchased?

c. What is? Kurz's share price just before the share? repurchase? How many shares will Kurz? repurchase?

d. What are? Kurz's market value balance? sheet, and share price after the share? repurchase?

a. What is the market value of? Kurz's existing assets before the? announcement?

The market value of? Kurz's existing assets before the announcement is

?$

million. ? (Round to one decimal? place.)

b. What is the market value of? Kurz's assets? (including any tax? shields) just after the debt is? issued, but before the shares are? repurchased?

The market value of? Kurz's assets? (including any tax? shields) just after the debt is? issued, but before the shares are repurchased is

?$

million.???(Round to one decimal? place.)

c. What is? Kurz's share price just before the share? repurchase? How many shares will Kurz? repurchase?

?Kurz's share price just before the share repurchase is

?$

.

? (Round to the nearest? cent.)                  

The number of shares that Kurz will repurchase is

million. ? (Round to two decimal? places.)

d. What are? Kurz's market value balance? sheet, and share price after the share? repurchase?

The market value of assets is

?$

million.???(Round to one decimal? place.)

The debt is

?$

million. ? (Round to the nearest? integer.)

The market value of equity is

?$

million.???(Round to one decimal? place.)

Share price after repurchase is

?$

.

?(Round to two decimal

places?.)

Answer 1

a. The market value of? Kurz's existing assets before the? announcement-29 million * $7=$203 million

b. The market value of? Kurz's assets? (including any tax? shields) just after the debt is? issued, but before the shares are? repurchased= $203+$40= $243 million, Interest rate is not mentioned in question hence tax shield impact cannot be found.

c. Kurz's share price just before the share? repurchase- this will remain $7 only since no further details of interest impact is given in the question.

No. of share repurchase= 40 million/7= 5.71 milion shares