The company currently has 1000 shares outstanding trading at $75. Therefore, the unlevered value of the firm is currently 75,000. The company has no debt but wants to conduct a leveraged buyback to establish a debt/new equity ratio of 2. The question is how much debt would the company need to issue to repurchase common stock to establish the targeted ratio.

Sirap Co. pays 40% in corporate taxes and is nanced entirely by common stock with a 1,000 shares outstanding trading at $75 per share. Sirap has only assets-in-place and, thus, does not grow. The risk-free debt yields 5% and the market risk premium is equal to 8%. Let EPS stand for earnings per share, E for equity, and D for debt. The CAPM beta of Siraps equity, E, is twice the portfolio weight on the risk-free asset of the ecient portfolio with a return equal to 6.6%.

For this part of the solution, all the primed variables, like E, denote after-renancing variables. Sirap now decides to switch to D/E = 2 by using debt to repurchase common stock.

If the debt is risk-free, can you calculate the amount of debt issued to obtain D/E = 2 (HINT: The answer is $68,181.82)?

The answer is $68, 182.82 but how was that calculated?