Problem
Tally Inc is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Tally plans to borrow $10 billion and use these funds to repurchase shares. The firm's marginal corporate tax is 35%, and Tally plans to keep its outstanding debt equal to $10 billion permanently.
1. Without the increase in leverage, what would Tally's share price be?
2. Suppose Tally offers $2.75 per share to repurchase its shares. Would shareholders sell for this price?
3. Suppose Tally offers $3.00 per share, and shareholders tender their shares at this price. What will Tally's share price be after the repurchase?
4. What is the lowest price Tally can offer and have shareholders tender their shares? What will its stock price be after the share repurchase in that case?