Question
Fezziwig International (FI), the world's largest manufacturer of snuff, has been in business since 1869. At the end of the current year, analysts expect Fezziwig's
Fezziwig International (FI), the world's largest manufacturer of snuff, has been in business since 1869. At the end of the current year, analysts expect Fezziwig's EBIT to be $2 million and they expect the same earnings annually in perpetuity. The cost of unlevered equity for FI is 14%. Fezziwig has 4 million shares outstanding. Fezziwig has $4 million of debt outstanding. Fezziwig is rated AAA and bondholders demand a yield of 4.75%. The CFO of Fezziwig, Jacob Marley, believes that the company is under-levered. To increase the leverage, Marley proposes to repurchase 1.25 million shares at a price of $1.25 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 34%. Answer the following questions to help Mr. Marley anticipate the impact of the repurchase.
a. What is the value of Fezziwig prior to the repurchase?
b. What is the stock price after the repurchase?
Please advise steps. The answer to a should be $10.79. I do not know how they calculated that :(
Thank you
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