Question
Alpha Inc. is an all equity firm with a perpetual EBIT of $2 million per year and has 500,000 shares outstanding. The value of the
Alpha Inc. is an all equity firm with a perpetual EBIT of $2 million per year and has 500,000 shares outstanding. The value of the firm currently is $8 million. The firm plans to issue $1.75 million worth of bonds with a coupon rate of 8% to repurchase stock. The tax rate of the firm is 40%. How many shares can the firm repurchase with money raised through debt?
a. 100,575
b. 100,645
c. 100,775
d. 110,000
e. None of the above
For the above problem, what is the cost of levered equity after the stock repurchase?
a. 15.69%
b. 15.98%
c. 16.06%
d. 16.35%
e. 17.12%
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