--%>
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 : Problem on required rate of return

    Tudor Online Publishing Corporation has tax rate of 35%, debt-to-equity ratio of 25%, and has (leveraged) beta 1.25. The riskless rate is 3% and the market return is 12%. Windsor Publishing Company is an all equity company and is in the same business. What is the requ

    		•
  • Q : Could we explain that the shares’ value

    Could we explain that the shares’ value is intangible?

    		•
  • Q : Define the term Stock Market crash

    Stock Market Crash was responsible for the Great Depression. Middle class families lost all their savings as they had gambled the market on margin.Those banks which were under the loan ofbrokers’ started removing money out of the savings account

    		•
  • Q : Explain useful properties of

    Explain useful properties of low-discrepancy sequence theory or quasi random number theory.

    		•
  • Q : Affect the value of the stock Is the

     Is the value of this stock dependent on how long you plan to hold it? In other words, if your planned holding period were 2 years or 5 years rather than 3 years, would this affect the value of the stock today, P0? Explain your answer.<

    		•
  • Q : State Exploitation of favorable market

    Exploitation of favorable market conditions: The firms after estimating WCR are in a position to clearly identify their status of excess current assets. After this realization they can use this knowledge to encash conditions arising in market even for

    		•
  • Q : Explain valuation method for

    We were assigned a valuation of a pharmaceutical laboratory’ shares. Which valuation method is further convenient?

    		•
  • Q : Problem regarding purchasing machine

    Alger Corp needs to buy some construction equipment for $50,000 that has a helpful life of 4 years with no salvage value. The Alger utilizes straight-line depreciation. Alger contains a tax rate of 30%, and it employs a discount rate of 10%. The equipment will produce

    		•
  • Q : Problem on leasing Johnathan Lewis is

    Johnathan Lewis is looking into the possibility of buying several coin-operated vending machines and put them in local hospitals. Each machine costs $2000, that he will depreciate on a straight-line basis over 8 years. The machine will dispense soft-drink cans at 75 c

    		•
  • Q : Explain consensus among the chief

    Is there any consensus among the chief authors in finance concerning the market risk premium?

    		•