Question
1. Rogot Instruments makes fine violins and cellos. It has $1.4 million in debtoutstanding, equity valued at $2.2 million and pays corporate income tax at
1. Rogot Instruments makes fine violins and cellos. It has $1.4 million in debtoutstanding, equity valued at $2.2 million and pays corporate income tax at rate 30%. Its cost of equity is 12% and its cost of debt is 8%.
a. What isRogot's pretaxWACC?
b. What isRogot's (effectiveafter-tax) WACC?
2. Rally, Inc., is anall-equity firm with assets worth $28 billion and 10 billion shares outstanding. Rally plans to borrow $12 billion and use funds to repurchase shares.Rally's corporate tax rate is 38%, and Rally plans to keep its outstanding debt equal to $12 billion permanently.
a. Without the increase inleverage, what would beRally's shareprice?
b. Suppose Rally offers $3.11 per share to repurchase its shares. Would shareholders sell for thisprice?
c. Suppose Rally offers $3.42 pershare, and shareholders tender their shares at this price. What will beRally's share price after therepurchase?
d. What is the lowest price Rally can offer and have shareholders tender theirshares? What will be its stock price after the share repurchase in thatcase?
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