Adam & Eve Inc. is a multinational firm that runs a global chain of for-profit blood banks, and is dual-headquartered out of both Tangiers and Detroit. The firm has a current share price of $24.38 and 10.1 million shares outstanding. The firm pays corporate tax at a rate of 25.0%. Suppose that Adam & Eve plans to lower its corporate taxes by issuing $53.7 million worth of bonds at par and using it to repurchase shares. Shareholders expect that the change in debt is going to be permanent, such that the firm will make constant annual coupon interest payments at a rate of 5.8% per annum for the foreseeable future. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) Which of the following will be closest to the value of each share of Adam & Eve Inc. after firm announces the leveraged recapitalization? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) In addition to the presence of corporate taxation, now suppose that finacnial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $25.20 per share after the firm announced the leveraged recapitalization. Which of the following is closest to the present value of the financial distress costs that shareholders believe Adam & Eve Inc. will incur as a result of changing to their new capital structure? The PV of the financial distress costs caused by issuing the debt must be $ million. (Round your answer to 2 decimal places) Adam & Eve Inc. is a multinational firm that runs a global chain of for-profit blood banks, and is dual-headquartered out of both Tangiers and Detroit. The firm has a current share price of $24.38 and 10.1 million shares outstanding. The firm pays corporate tax at a rate of 25.0%. Suppose that Adam & Eve plans to lower its corporate taxes by issuing $53.7 million worth of bonds at par and using it to repurchase shares. Shareholders expect that the change in debt is going to be permanent, such that the firm will make constant annual coupon interest payments at a rate of 5.8% per annum for the foreseeable future. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) Which of the following will be closest to the value of each share of Adam & Eve Inc. after firm announces the leveraged recapitalization? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) In addition to the presence of corporate taxation, now suppose that finacnial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $25.20 per share after the firm announced the leveraged recapitalization. Which of the following is closest to the present value of the financial distress costs that shareholders believe Adam & Eve Inc. will incur as a result of changing to their new capital structure? The PV of the financial distress costs caused by issuing the debt must be $ million. (Round your answer to 2 decimal places)
