Question
Molly's Inc. is the world's largest manufacturer of widgets. At the end of the current year, analysts expect Molly's EBIT to be $2Million and they
Molly's Inc. is the world's largest manufacturer of widgets. At the end of the current year, analysts expect Molly's EBIT to be $2Million and they expect the same earnings annually in perpetuity. Molly's shareholders require a return of 10% and there are 5Million common shares outstanding. Molly has debt with a total face value of $5Million. The bonds have an annual coupon of 5%, are rated AAA and yield 5%. The CFO of Molly believes that the company is under-levered. To increase the leverage, the CFO proposes to repurchase 1M shares at a price of $1.50 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 40%. What is the value of the company prior to the repurchase, and what is the stock price after the repurchase?
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