Assume a perfect capital market but with taxes (tax rate is 35%). Euphon Inc. does not currently have debt in its balance sheet. Euphons equity value is $100 million and has $20 million of cash. There are currently 20 million shares outstanding. Euphon is considering taking on $40 million debt which will be used entirely to repurchase shares. Assume that the new debt will be riskfree.

1. What should the minimum repurchase offer price be in order to attract current shareholders to tender their shares to Euphon?

2. If the offer price is set as your answer in (i), what is the price per share of Euphon after the share repurchase?

3. Assume that the risk free rate is 2%, the market risk premium is 6% and the beta of Euphon equity prior to the leveraged recapitalization is 0.80. Find the WACC (with tax) before leveraged recapitalization and the WACC (with tax) after leveraged recapitalization.

MARKET VALUE BALANCE SHEET Assets New Cash (from new debt) Existing Cash Other Assets Total assets Liabilities New Debt Existing Debt Equity = Assets - Liabilities Shares Out Price per share 100 20 5.00