Question
At the end of the current year, analysts expect a companys EBIT to be $12.5M and they expect the same earnings annually in perpetuity. The
At the end of the current year, analysts expect a companys EBIT to be $12.5M and they expect the same earnings annually in perpetuity. The cost of unlevered equity for the company is 12.5%. The company has 5M shares outstanding and $40M of debt outstanding. The company is rated AAA and bondholders demand a yield of 5%. The management of the company believes that the company is underlevered. To increase the leverage, the management proposes to repurchase 0.5M shares at a price of $8.5 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 38%.
What will the stock price be after the repurchase?
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