--%>
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 : Define Effective Utilization of Funds

    Effective Utilization of Funds: It is just the decision to maximize the return on investment of funds. When finance manager is not capable to raise the return by investing fund in profitable assets or other profitable projects, company’s busines

    		•
  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

    		•
  • Q : What is real gross domestic product

    Real gross domestic product: If GDP of a particular year is estimated or evaluated on the basis of the base year prices it is termed as real gross domestic product.

    		•
  • Q : What is the impact of auto portfolio

    What is the impact of auto portfolio into the quotation of the shares?

    		•
  • Q : Porters Primary activities Porter’s

    Porter’s Primary activities: 1. Inbound Logistics: • Suppliers’ details.• Storage details with respect to materials.• Details regarding pl

    		•
  • Q : Data Case Please Assist with the

    Please Assist with the attached Data Case Assignment

    		•
  • Q : Analysis on Stock Prices Using the last

    Using the last 3 years of closing stock prices on the first trading day of each month from January,  2010 through December 2012 for Apple (APPL) and the S&P 500 (market) for the same date range 1)    &n

    		•
  • Q : Explain company creates value for its

    Is this true that a company creates value for its shareholders in a year when this distributes dividends or when the quotation of the shares increases?

    		•
  • Q : Zero Coupon Bonds-Corporate Bonds

    Describe the term Zero Coupon Bonds in Corporate Bonds?

    		•
  • Q : Which data is the most suitable for

    Which data is the most suitable for finding betas?

    		•