A firm currently has no debt. The firm has 15 million shares outstanding and tho

Question

A firm currently has no debt. The firm has 15 million shares outstanding and those shares currently have a market price of $25 per share. The firm is contemplating selling $50 million in bonds and using the proceeds to repurchase shares of stock. If they undertake this action, the firm intends to keep this level of debt financing for the foreseeable future. Assume that the corporate tax rate is 30%. Given this data, if the firm announces that they will sell the bonds and repurchase equity what:

(a) do you expect the stock price to be immediately after the announcement?

(b) will be the firm’s total market value of equity immediately after the announcement?

(c) do you expect the stock price to be after the bond issue/repurchase are completed?

(d) will be the firm’s total market value of equity after the bond issue/repurchase are completed?

Explanation / Answer

Solution.

A. In genrally after buy-back of share market price of share in increse.

B. MV = P / S

MV = $25 / 15 million   = 1.66 million  

C.If all share are buy-back then it can't be find.

D. No of share buy-back is not given in question.

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