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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Question
You own 100 shares of ABC corp. that is into pipe manufacturing business. ABC corp. currently has 10000 shares outstanding. The firm has a total asset size of Rs 1 million entirely funded by equity. The firm’s EBIT is expected to be Rs 100,000 forever and the firm pays out all earnings as dividends. The cost of borrowing in the market is 8%. Assume perfect market conditions of MM world (no tax, same borrowing cost etc.). Suppose, ABC corp. comes up with a new idea to buy back shares from the market to replace equity. The idea is to add Rs 350,000 worth of debt.
Q: What is the new stock price after the repurchase?.
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