Question 2 Pesca dos Acores is a fishing company in the Isle of Acores. It has 80 million shares outstanding with a market price of E32 per share anthno debt. Pesca dos Acores has had consistently stable earnings, and pays a 25% tax rate. Management plans to borrow 1 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Disregard any costs of financial distress for this question, i.e., you can consider they are always zero. a) What is the present value of debt tax shields created by the leveraged recapitalization operation?

[4 marks] b) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value before the announcement of the recapitalization?

c) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the announcement of the recapitalization, but before the company issues debt? [4 marks]

d) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the issuance of debt, but before the company uses the borrowed funds to buy back shares?

[4 marks] e) What is the share price, number of shares outstanding, market value of equity. market value of debt and the enterprise value after the company uses the borrowed funds to buy back shares? f) Discuss the following statement: "The benefits and costs of a leveraged recapitalization is split between shareholders and debtholders". [4 marks] [5 marks]

Question 2 Pesca dos Aores is a fishing company in the Isle of Aores. It has 80 million shares outstanding with a market price of 32 per share and no debt. Pesca dos Aores has had consistently stable earnings, and pays a 25% tax rate. Management plans to borrow 1 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Disregard any costs of financial distress for this question, i.e., you can consider they are always zero. a) What is the present value of debt tax shields created by the leveraged recapitalization operation? [4 marks] b) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value before the announcement of the recapitalization? [4 marks] c) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the announcement of the recapitalization, but before the company issues debt? [4 marks] d) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the issuance of debt, but before the company uses the borrowed funds to buy back shares? [4 marks] e) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the company uses the borrowed funds to buy back shares? [4 marks] f) Discuss the following statement: "The benefits and costs of a leveraged recapitalization is split between shareholders and debtholders". [5 marks] Question 2 Pesca dos Aores is a fishing company in the Isle of Aores. It has 80 million shares outstanding with a market price of 32 per share and no debt. Pesca dos Aores has had consistently stable earnings, and pays a 25% tax rate. Management plans to borrow 1 billion on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. Disregard any costs of financial distress for this question, i.e., you can consider they are always zero. a) What is the present value of debt tax shields created by the leveraged recapitalization operation? [4 marks] b) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value before the announcement of the recapitalization? [4 marks] c) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the announcement of the recapitalization, but before the company issues debt? [4 marks] d) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the issuance of debt, but before the company uses the borrowed funds to buy back shares? [4 marks] e) What is the share price, number of shares outstanding, market value of equity, market value of debt and the enterprise value after the company uses the borrowed funds to buy back shares? [4 marks] f) Discuss the following statement: "The benefits and costs of a leveraged recapitalization is split between shareholders and debtholders". [5 marks]