Assume a world with corporate tax rate of 50% and no personal taxes. Company U has no debt, an operating income of $48m, a return on equity %20, and 3m shares outstanding. Company U decides to borrow $60m at and interest rate of 10% and use the proceeds to repurchase shares.
A) What is the market value of Company U before the debt issue?
B) What is the present value of the tax shield?
C) What are the stock price and the market value balance sheet after the share repurchase?