17.11 ABC, Inc., is an unlevered firm with expected perpetual annual before-tax cash flows of $30 million

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17.11 ABC, Inc., is an unlevered firm with expected perpetual annual before-tax cash flows of

$30 million and required return on equity of 18 percent. It has 1 million shares outstanding. ABC is paying tax at a marginal rate of 34 percent. The firm is planning a recapitalization under which it will issue $50 million of perpetual debt bearing a 10-

percent interest rate and use the proceeds to buy back shares. Calculate the post-recap share price, earnings per share, and required return on equity.

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Corporate Finance

ISBN: 9780071229036

6th International Edition

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe

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