Chapter 15, Problem 18P

Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow $50 million and use the funds to repurchase shares. Kurz will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a 40% corporate tax rate.

1. a. What is the market value of Kurz’s existing assets before the announcement?
2. b. What is the market value of Kurz’s assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?
3. c. What is Kurz’s share price just before the share repurchase? How many shares will Kurz repurchase?
4. d. What are Kurz’s market value balance sheet and share price after the share repurchase?