General Accounting Big Blue Banana (BBB) is a clothing retailer witha current share price of $20 and with 30 millionshares outstanding. Suppose BBB announces a plan tolower its corporate taxes by borrowing $81 millionand using the proceeds to repurchase shares.Suppose BBB pays corporate taxes of 35% and thatshareholders expect the change in debt to bepermanent. Assuming thatthat capital markets areperfect except for thethe existence of corporatetaxes, what is the share price of BBB after thisannouncement?

Steps to Calculate the New Share PriceStep 1: Calculate the Value of the Tax ShieldThe tax shield is…

Answered: Big Blue Banana (BBB) is a clothing…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2P

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Hawar International is a shipping firm with a current share price of $4.94 and 9.8 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.7 million and repurchasing shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent. a. If the only imperfection is corporate taxes, what will be the share price after this announcement? b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? a. If the only imperfection is corporate taxes, what will be the share price after this announcement? The share price after this announcement will be $ per share. (Round to the nearest cent.) b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this…
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
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As a financial analyst at JPMorgan Chase, you are analyzing the impact of debt on the value of the firm. Suppose BAC Company has no debt in its capital structure. The company is valued at $300 million. Assume the corporate tax rate is 20%. a. What would be the value of tax shield if it issued $100 million in perpetual debt and repurchased the equity? (sample answer: 200.40) b. What would be the value of the firm if it issued $100 million in perpetual debt and repurchased the equity? ( sample answer: 200.40)
Qlink ltd is involved in manufacturing of fast -moving consumer goods.The firm is currently an all -equity firm with 30 million shares outstanding and stock price of Kshs.10 per share.The firm plans to announce that it will borrow Ksshs.400 million and use the funds to repurchase shares. The firm will pay interest only on this debt and has no plans to change its debt holding in future. The prevailing corporate tax rate is 30%.(i)What is the market value of the firm's existing existing assets before the announcement?(ii)What is the market value of the firm's assets(including tax shields) just after the debt is issued but before the shares are repurchased?(iii)What is the firm's share price just before the share repurchase?However many shares will Qlink Ltd repurchased?(iv) What are Qlink Ltd's market value balance sheet and share price after share repurchase?
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Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
An unlevered firm, U, operates in a perfect market and has a net operating income of GHC250,000.00 and required rate of return on assets for firms in the industry is 12.5%. The firm issues GHC1,000,000.00 worth of debt with a required return of 5% and uses the proceeds to repurchase outstanding shares. The firm U operates in a perfect market without corporate or personal taxes. Required: 1.Estimate the market value and required return of th firm’s shares before the repurchase transaction 2. Estimate the market value and required return of the firm’s remaining shares after the repurchase transaction
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