Company A had 30% debt and 70% equity (in market value terms). It had 1 million shares outstanding, and the stock traded at $35. It decides on a leveraged recapitalization by issuing an additional $15 million of debt and using the proceeds to buy back stock.
Company A had 30% debt and 70% equity (in market value terms). It had 1 million shares outstanding, and the stock traded at $35. It decides on a leveraged recapitalization by issuing an additional $15 million of debt and using the proceeds to buy back stock.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Company A had 30% debt and 70% equity (in market value terms). It had 1 million shares outstanding, and the stock traded at $35. It decides on a leveraged recapitalization by issuing an additional $15 million of debt and using the proceeds to buy back stock. The value of the old debt falls by 20% as a result of the recapitalization. The company's tax rate is 40%. The expected bankruptcy costs resulting from the debt issue are $3 million, and the expected signaling effect is an event return of 5%. If the management wants to buy back the stock at a fair price, it should repurchase _______ shares at _______.
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