Question
BBB is a clothing retailer with a current share price of $10.00 per share and has 25 million shares outstanding. Suppose that Four, Inc. announces
BBB is a clothing retailer with a current share price of $10.00 per share and has 25 million shares outstanding. Suppose that Four, Inc. announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.
(a) Assuming perfect capital markets (including no income tax), find BBB Inc.s expected share price after the announcement.
(b) Find the new share price after the announcement if BBB, Inc. pays 35% in corporate tax and shareholders expect the change in capital structure to be permanent. Also assume that corporate taxes are the only market imperfection. [Assume that the $10 share price already reflects the 35% tax rate for the unlevered firm].
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