Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 15, Problem 19P
Rally, Inc., is an all-equity firm with assets worth $25 billion and 10 billion shares outstanding. Rally plans to borrow $10 billion and use these funds to repurchase shares. The firm’s corporate tax rate is 35%, and Rally plans to keep its outstanding debt equal to $10 billion permanently.
- a. Without the increase in leverage, what would Rally’s share price be?
- b. Suppose Rally offers $2.75 per share to repurchase its shares. Would shareholders sell for this price?
- c. Suppose Rally offers $3.00 per share, and shareholders tender their shares at this price. What will Rally's share price be after the repurchase?
- d. What is the lowest price Rally can offer and have shareholders tender their shares? What will its stock price be after the share repurchase in that case?
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Rally inc is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. Without the increase in leverage, what is the value of the firm?
Chapter 15 Solutions
Corporate Finance
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - Prob. 2CCCh. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
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