Question
You own 100 shares of ABC corp. that is into pipe manufacturing business. ABC corp. currently has 10000 shares outstanding. The firm has a total
You own 100 shares of ABC corp. that is into pipe manufacturing business. ABC corp. currently has 10000 shares outstanding. The firm has a total asset size of | 1 million entirely funded by equity. The firms EBIT is expected to be | 100,000 forever and the firm pays out all earnings as dividends. The cost of borrowing in the market is 8%. Assume perfect market conditions of MM world (no tax, same borrowing cost etc.)
1. Currently, what is ABC corp. stock price?
2. Suppose, ABC corp. comes up with a new idea to buy back shares from the market to replace equity. The idea is to add | 350,000 worth of debt. How many shares will be bought back?
3. What is the new stock price after the repurchase?
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