Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of

Question:

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 25% corporate tax rate.
a. What is the market value of Kurz’s existing assets before the announcement?
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?
c. What is Kurz’s share price just before the share repurchase? How many shares will Kurz repurchase?
d. What are Kurz’s market value balance sheet and share price after the share repurchase?

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Fundamentals Of Corporate Finance

ISBN: 9780135811603

5th Edition

Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford

Question Posted: