Next you show Benjamin the impact of the investment bankers share repurchase proposal: the company could raise $10 billion new debt at the current rate of 2.1% to repurchase its own shares.

4. Assuming the firm plans to keep this new debt outstanding forever, calculate the present value of the interest tax shield (ITS) of the new debt.

5. Compute the market value of the equity, the share price, and the number of shares outstanding, at the time of the announcement for the repurchase and after the repurchase is complete, respectively (assume no arbitraging).

6. Use the above analysis to explain whether this repurchase is a good deal. Discuss how this deal has affected the total value of the company.

have been common dividends and cash consideration paid in various acquisitions. Dividends per share had risen only modestly during 2015-2019. However, as the company issued new shares in connection with some of its acquisitions, the number of shares outstanding increases to approximately 1.27 billion by the end of 2019. Net income (000) Average number of shares outstanding (000s) Effective corporate tax rate Average cost of bonds 31/12/2019 8,248,500 1,267,881 36.50% (use this rate in your calculations) 2.1% On a bright Friday afternoon, Benjamin sat in his office reflecting on a meeting he had with an investment banker earlier in the week. The banker, whom Benjamin had known for years, asked for the meeting after a group of private equity investors made discreet inquiries about a possible acquisition of HD. Although HD was a public company, a majority of its shares were controlled by family members descended from the firm's founders together with various family trusts. Benjamin knew the family had no current interest in selling - on the contrary, HD was interested in acquiring other companies in the same industry - so this overture, like a few others before it would be politely rebuffed. Nevertheless, Benjamin was struck by the banker's assertion that a private equity buyer could "unlock" value inherent in HD's strong operations and balance sheet. Using cash on HD's balance sheet and new borrowings, a private equity firm could purchase all of HD's outstanding shares at a price higher than its current stock price of $114.33 per share. It would then repay the debt over time using the company's future earnings. The banker pointed out that HD itself could do the same thing - borrow money to buy back its own shares. In the days since the meeting, Benjamin's thoughts kept returning to a share repurchase. Working as the analyst for the company, you are asked to prepare a report to explain the pros and cons of this deal. Here is a draft of your report. 31/12/2019 Case Exhibit 1: HD's Balance Sheet (in 000s) Balance Sheet (000s) Period Ending: Current Assets Cash and Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets 1,723,000 0 1,484.000 11,079,000 1,016,000 15,302,000 Long Term Assets Fixed Assets Goodwill Intangible Assets Other Assets Total Assets 22,720,000 1,353,000 0 571.000 39,946,000 Liabilities & stock holders' Equity: Accounts Payable Short Term Debt Current Portion of Long Term Debt Other Current Liabilities Total Current Liabilities 9,473,000 328.000 1,468,000 11,269,000 Long Term Debt Other Liabilities Deferred Liability Charges Total Liabilities 16,869,000 1,844,000 642.000 30,624,000 Share Holders Equity Common Stocks Capital Surplus Retained Earnings Treasury Stock Other Equity Total Equity 88,000 8,885,000 26,995,000 -26194000 452000 9,322,000 Case Exhibit 2: HD's Income Statement (in 000) Income Statement (000s) Period Ending: Total Revenue Cost of Revenue Gross Profit 31/12/2019 83,176,000 54,222,000 28,954,000 Operating Expenses Sales, General and Admin. Other Operating Items Operating Income Additional income/expense items EBIT Interest Expense Earnings Before Tax Income Tax Net Income-Cont. Operations Net Income Applicable to common shareholders 21,884,200 2,146,300 13,609,700 438,100 14,047,800 1,079,000 12,968,800 4,720,300 8,248,500 6,598,800 have been common dividends and cash consideration paid in various acquisitions. Dividends per share had risen only modestly during 2015-2019. However, as the company issued new shares in connection with some of its acquisitions, the number of shares outstanding increases to approximately 1.27 billion by the end of 2019. Net income (000) Average number of shares outstanding (000s) Effective corporate tax rate Average cost of bonds 31/12/2019 8,248,500 1,267,881 36.50% (use this rate in your calculations) 2.1% On a bright Friday afternoon, Benjamin sat in his office reflecting on a meeting he had with an investment banker earlier in the week. The banker, whom Benjamin had known for years, asked for the meeting after a group of private equity investors made discreet inquiries about a possible acquisition of HD. Although HD was a public company, a majority of its shares were controlled by family members descended from the firm's founders together with various family trusts. Benjamin knew the family had no current interest in selling - on the contrary, HD was interested in acquiring other companies in the same industry - so this overture, like a few others before it would be politely rebuffed. Nevertheless, Benjamin was struck by the banker's assertion that a private equity buyer could "unlock" value inherent in HD's strong operations and balance sheet. Using cash on HD's balance sheet and new borrowings, a private equity firm could purchase all of HD's outstanding shares at a price higher than its current stock price of $114.33 per share. It would then repay the debt over time using the company's future earnings. The banker pointed out that HD itself could do the same thing - borrow money to buy back its own shares. In the days since the meeting, Benjamin's thoughts kept returning to a share repurchase. Working as the analyst for the company, you are asked to prepare a report to explain the pros and cons of this deal. Here is a draft of your report. 31/12/2019 Case Exhibit 1: HD's Balance Sheet (in 000s) Balance Sheet (000s) Period Ending: Current Assets Cash and Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets 1,723,000 0 1,484.000 11,079,000 1,016,000 15,302,000 Long Term Assets Fixed Assets Goodwill Intangible Assets Other Assets Total Assets 22,720,000 1,353,000 0 571.000 39,946,000 Liabilities & stock holders' Equity: Accounts Payable Short Term Debt Current Portion of Long Term Debt Other Current Liabilities Total Current Liabilities 9,473,000 328.000 1,468,000 11,269,000 Long Term Debt Other Liabilities Deferred Liability Charges Total Liabilities 16,869,000 1,844,000 642.000 30,624,000 Share Holders Equity Common Stocks Capital Surplus Retained Earnings Treasury Stock Other Equity Total Equity 88,000 8,885,000 26,995,000 -26194000 452000 9,322,000 Case Exhibit 2: HD's Income Statement (in 000) Income Statement (000s) Period Ending: Total Revenue Cost of Revenue Gross Profit 31/12/2019 83,176,000 54,222,000 28,954,000 Operating Expenses Sales, General and Admin. Other Operating Items Operating Income Additional income/expense items EBIT Interest Expense Earnings Before Tax Income Tax Net Income-Cont. Operations Net Income Applicable to common shareholders 21,884,200 2,146,300 13,609,700 438,100 14,047,800 1,079,000 12,968,800 4,720,300 8,248,500 6,598,800