GoRose plc has 10 million shares outstanding with a market price of 40 per share and no debt. The management plans to issue 200 million debt on a permanent basis and use the raised funds to repurchase outstanding shares. Suppose that the company has had and continues to have stable earnings, and it pays 40% corporate tax.

REQUIRED:

1. Assume that capital markets are perfect except for corporate taxes, calculate the total value of GoRose as a levered firm.

2. Suppose that capital markets are perfect except for corporate taxes and the company is able to repurchase its outstanding shares at 40 per share, calculate the value of a share of GoRose after the repurchase.

3. Suppose that after the repurchase, the market price of GoRoses shares is 50 per share (absent any other news), briefly discuss why the actual market price might be lower than the estimated share price.