--%>
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 : Widgets You are required to submit a

    You are required to submit a bid to supply 200,000,000 widgets per year to the State of Illinois for the next five years. Your company has an idle tract of real estate that cost $1,500,000 ten years ago; if your company sold the land today, it would generate $3,000,000 after the taxes were paid. The

    		•
  • Q : Estimate stock's current price A

    A company currently pays a dividend of $3.75 per share, D0 = 3.75. It is estimated that the company's dividend will grow at a rate of 15% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% the

    		•
  • Q : What is the required rate of return on

    Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 9% a year. What st

    		•
  • Q : Who explain match theoretical & market

    Who demonstrated that how to match theoretical and market prices for normal bonds?

    		•
  • Q : Explain any indisputable model for

    Is there any indisputable model for valuing the brand of a company?

    		•
  • Q : Explain definition of put–call parity

    Explain the definition of put–call parity described by Reinach.

    		•
  • Q : Capital Structure Case Study 1 You work

    Case Study 1 You work in Walt Disney Company's corporate finance and treasury department and have just been assigned to the team estimating later today. You quickly realize that the information you need is readily available online. 1) Go to http://finance.yahoo.com. under " Market Summary," you

    		•
  • Q : Calculate valuation realized by

    Is a valuation realized through a prestigious investment bank a scientifically approved result that any investor could utilize as a reference?

    		•
  • Q : Define the term Commercial Paper

    Commercial Paper: It is an unsecured obligation issued by the corporation or bank to finance its short-term credit requirements, like accounts inventory and receivable. Maturities usually range from 2 to 270 days. The commercial paper is accessible in

    		•
  • Q : Do expected equity flows coincide with

    Do expected equity flows coincide along with expected dividends?

    		•