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I am confused about this problem. Thank you! LevBuyout Corp is an all equity firm. It has 20 million shares. EBIT is expected to be
I am confused about this problem. Thank you!
LevBuyout Corp is an all equity firm. It has 20 million shares. EBIT is expected to be $75 million in one year, and to grow by 5% per year in perpetuity. LevBuyout's (equity) beta is 0.8, the risk-free rate is 3%, and the market risk premium is 10%. The corporate tax rate is 20%. LevBuyout is considering doing a leveraged recapitalization, i.e., issuing debt to buy back some shares. (a) What is the value and share price of LevBuyout if it remains an all equity firm? (b) Suppose LevBuyout announces that it will henceforth switch to 30% debt financ- ing, by issuing debt and buying back the appropriate amount of stock. LevBuyout can issue debt at an interest rate of 5% per year. What is the value of Lev Buyout after this announcement? (c) What is the value of the debt that LevBuyout needs to issue? (d) At what price does LevBuyout buy back its shares? (e) Who gains from the leveraged recapitalization and by how muchStep by Step Solution
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