Question: Rally Inc is an all equity firm with assets worth 25

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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  • CreatedAugust 06, 2014
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