Question
An all-equity business has 170 million shares outstanding selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute
An all-equity business has 170 million shares outstanding selling for $20 a share. Management believes that interest rates are unreasonably low and decides to execute a leveraged recapitalization (a recap). It will raise $1 billion in debt and repurchase 50 million shares.
a. What is the market value of the firm prior to the recap? What is the market value of equity? (Enter your answers in billions rounded to 1 decimal place.)
b. Assuming the Irrelevance Proposition holds, what is the market value of the firm after the recap? What is the market value of equity? (Enter your answers in billions rounded to 1 decimal place.)
d. Assume now that the recap increases total firm cash flows, which adds $240 million to the value of the firm. Now what is the market value of the firm? What is the market value of equity? (Enter your answers in billions rounded to 2 decimal places.)
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
