Question
CapitalIQ is an all-equity firm, which has a pretax cash flow (EBIT) of $5 million each year and it expects that this pretax cash flow
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CapitalIQ is an all-equity firm, which has a pretax cash flow (EBIT) of $5 million each year and it expects that this pretax cash flow is perpetual. The firm has 1 million shares outstanding, the cost of capital of 10%, and the corporate tax rate of 35%. CapitalIQ plans to announce a leveraged recapitalization plan in which it will borrow $5 million and use these funds to repurchase shares. It also plans to keep its outstanding debt equal to $5 million permanently. After the share repurchase plan, the equity value of CapitalIQ is closest to
A. $27.00 million
B. $29.25 million
C. $10.00 million
D. $32.25 million
CapitalIQ is an all-equity firm, which has a pretax cash flow (EBIT) of $5 million each year and it expects that this pretax cash flow is perpetual. The firm has 1 million shares outstanding, the cost of capital of 10%, and the corporate tax rate of 35%. CapitalIQ plans to announce a leveraged recapitalization plan in which it will borrow $5 million and use these funds to repurchase shares. It also plans to keep its outstanding debt equal to $5 million permanently. After the share repurchase plan, the equity value of CapitalIQ is closest to
| A. | $27.00 million | |
| B. | $29.25 million | |
| C. | $10.00 million | |
| D. | $32.25 million |
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