--%>
Assignment Help - homework help

Problem on Stock per share value

ABC Company plans to buy back 1 million shares of its own stock from its cash reserves at $50 a share. This will raise the bankruptcy costs by $10 million, and the debt/assets ratio from 35% to 40%. The income tax rate of the company is 30%. Determine the value of the stock per share after this buyback. Is the company making the correct move?

E

Expert

Verified

Shares repurchased = 1 million*$50 = $50 million

Increase in bankruptcy costs = $10 million

Assume the total value is $1000 million. Since the debt-to-assets ratio is 35% initially, the value of debt is $350 million and that of equity is $650 million. Assuming that the after-tax cost of debt is 5.6%

Value of firm after buy back = 1000 + 50*.3 – (10*.3)/0.056 = 961.43 million
Value of equity = 0.6*961.43 = 576.88
Share price before buy back = 650/50 =13 million shares
Since 1 million is bought back,
Share price after buyback = 576.88/12 = $48.07

Hence the company is not making the right move.

   Related Questions in Corporate Finance

  • Q : Bank assignment You have just been

    You have just been hired as the branch manager for a big bank in XYZ. You were told that the bank is going to open a new branch at Island Learning Centre of the Open University of XYZ. The management of the bank is much concerned that the new branch might not be able

    		•
  • Q : Who explained market-neutral delta

    Who explained market-neutral delta hedging?

    		•
  • Q : In which cases use different WACCs Is

    Is this possible to use different WACCs within order to discount each year’s flows? In which cases?

    		•
  • Q : Calculating Beta when market

    A company with a market capitalization of $100 million has no debt and a beta of 0.8. What will its beta be after it borrows $50 million (giving that there are no other changes and no taxes)?

    		•
  • Q : WCR lower cost of storage Inventory is

    Inventory is an important part of WCR estimation. It is a current asset, which depletes over period of time. Also, it requires creation of facility, which would help in storing the inventory and estimate the associated cost of maintaining and transporting it. The esti

    		•
  • Q : Who described option pricing with

    Who described option pricing with deterministic volatility?

    		•
  • Q : What is nonlinearity in option pricing

    What is nonlinearity in option pricing model?

    		•
  • Q : How can auditor spot acts of creative

    How can auditor spot acts of creative accounting? Means let an illustration, the excess of provisions or the non-elimination of intra group transactions along with value added.

    		•
  • Q : Difference between capitalization and

    Is the difference for the value creation in a company among the market value of the shares (capitalization) and their book value a good measure since its foundation?

    		•
  • Q : Who wrote famous paper- distribution of

    Who wrote famous paper of on distribution of cotton price returns?

    		•