Question
ABC Inc. is an all-equity firm. Its assets are worth $25 billion and they have 10 billion shares outstanding. The CFO plans to borrow $10
ABC Inc. is an all-equity firm. Its assets are worth $25 billion and they have 10 billion shares outstanding. The CFO plans to borrow $10 billion and use these funds to repurchase shares. The firms corporate tax rate is 35%, and ABC plans to keep its outstanding debt equal to $10 billion permanently.
a. Without the increase in leverage, what would ABC share price be?
b. Suppose ABC offers $2.75 per share to repurchase its shares. Would shareholders sell for this price?
c. Suppose ABC offers $3.00 per share, and shareholders tender their shares at this price. What will Rallys share price be after the repurchase?
d. What is the lowest price ABC can offer and have shareholders tender their shares? What will its stock price be after the share repurchase in that case?
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