The Eagle Inc. has 40 million shares outstanding, which are trading at $20 per share. Eagle maintains a constant debt level of $100 million. Suppose Eagle announces a recapitalization: it will first issue additional $400 million of debt (all investors are aware of this debt issuance) and then use $300 million to repurchase shares. The remaining $100 million is kept on the balance sheet as cash (hint: so the cash will not generate interest income). After this recapitalization, the Eagle Inc. will maintain its debt level indefinitely. The tax rate is 35%, and the interest rate of Eagle’s debt is 6%. a. What is the value of Eagle’s equity after therecapitalization? The value of equity is b. What is the stock price after the announcement? How many shares will the firm repurchase? The stock price will be _______ after the announcement. The firm will repurchase_______ million shares. (Round to two decimal places.)
The Eagle Inc. has 40 million shares outstanding, which are trading at $20 per share. Eagle maintains a constant debt level of $100 million. Suppose Eagle announces a recapitalization: it will first issue additional $400 million of debt (all investors are aware of this debt issuance) and then use $300 million to repurchase shares. The remaining $100 million is kept on the balance sheet as cash (hint: so the cash will not generate interest income). After this recapitalization, the Eagle Inc. will maintain its debt level indefinitely. The tax rate is 35%, and the interest rate of Eagle’s debt is 6%.
a. What is the value of Eagle’s equity after therecapitalization?
The value of equity is
b. What is the stock price after the announcement? How many shares will the firm repurchase?
The stock price will be _______ after the announcement. The firm will repurchase_______
million shares. (Round to two decimal places.)
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