Kurz Manufacturing is currently a levered firm with 50M shares outstanding priced at $10.00 per share and 250K bonds outstanding at $1000 per bond (this is also the face value of each bond). Investors expect these bonds to pay interest of 4% per year and this debt level to be held in perpetuity. Assume that Kurz is subject to a 25% corporate tax rate.
a. What is the market value of Kurz's existing assets?
b. The value of Kurz's assets consists of the value of operating assets and the value of the tax shield. What is the value of the tax shield and operating assets?
Kurz announces that tomorrow it will issue $100M worth of shares and use those funds to retire $100M worth of debt. Assume that the market did not expect his announcement.
c. What is the new price per share immediately following this anointment, but before the shares are issued or the debt is retired?
d. What percentage of the firm's equity does Kurz have to sell to rise $100M?