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res. The firm will pay interest only on this a future. The prevailing corporate tax rate e market value of the fim's existing assets e market value of the firm's assets (includ

res. The firm will pay interest only on this a future. The prevailing corporate tax rate e market value of the fim's existing assets e market value of the firm's assets (includ

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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2. 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 a stock price of Kshs. 10 per share. The firm plans to announce that it will borrow Kshs.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 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? How many shares will Qlink Ltd repurchase? (iv)What are Qlink Ltd's market value balance sheet and share price after the share repurchase?
Transcribed Image Text:2. 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 a stock price of Kshs. 10 per share. The firm plans to announce that it will borrow Kshs.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 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? How many shares will Qlink Ltd repurchase? (iv)What are Qlink Ltd's market value balance sheet and share price after the share repurchase?
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