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Revcorp is planning to repurchase shares of common stock with the proceeds of a $800 million debt issue. The interest rate on the debt is
Revcorp is planning to repurchase shares of common stock with the proceeds of a $800 million debt issue. The interest rate on the debt is expected to be 12%. Currently, Revcorp is unlevered with 100,000,000 common shares outstanding. The price-eamings ratio of the common shares is 5 based on pre-tax operating income of $800 million. The equity has a required rate of return of 20% based on an equity beta of 1.77. Assuming the company's tax rate is 40%, there are no personal taxes and all cash ows are level perpetuities, answer the following questions: a) Compute the company's earnings per share, stock price and market value before the debt issue and stock repurchase. b) Assume Revcorp repurchases its outstanding shares at the current price (which you have calculated in a). Compute the company's market value and stock price after the debt issue and stock repurchase
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