Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Alpha has 10 million shares outstanding with a market price of $5 per share and no debt. The company generates consistently stable earnings and pays

Alpha has 10 million shares outstanding with a market price of $5 per share and no debt. The company generates consistently stable earnings and pays a corporate tax rate of 35%. The firm just announces it will issue a consol (or perpetuity) bond with a par value of $10 million at a coupon rate of 5%. The company will use the borrowed funds to repurchase outstanding shares.

i. What is the stock price of Alpha On the announcement date?

ii.What is the stock price of Alpha On the date when the consol bond is issued but before the share repurchase?

iii. What is the stock price of Alpha After the share repurchase?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction To Corporate Finance

Authors: William L. Megginson, M.D. Lucey Brian C., Scott J. Smart, Scott B. Smart, Bill Megginson

1st Edition

184480562X, 9781844805624

More Books

Students also viewed these Finance questions