Vatman Inc is an all-equity financed firm with a cost of equity of 20%. Its EBIT is currently $100,000 and the analysts of Vatman expect this amount to stay constant forever. The firm considers a change in its capital structure. It plans to borrow $50,000 at 10% and to use the proceeds to repurchase shares of stock. The effective tax rate is 30%. Assume that depreciation expense is zero and that the firm requires no new investments in NWC or capital expenditure. Also, assume that the firm pays out all its net income as dividends to its shareholders. Assume that Vatman Inc. exists in an MM world with taxes (i.e., you may ignore all other imperfections, apart from taxes, that we discussed in class).

A. Compute the firm value (V) and equity value (S) of Vatman Inc. after the repurchase.

V =

S =

B. Compute the new R_S and WACC for Vatman Inc.

R_S =

WACC =

C. Vatman Inc has 25,000 shares outstanding which are currently trading at $14.00 per share. Compute how many shares will be repurchased and the new stock price. Assume efficient capital markets.

Shares =

Repurchased

Stock =

Price