Question
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?
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