Fezziwig International (FI), the world’s largest manufacturer of snuff, has been in business since 1869. At the end of the current year, analysts expect Fezziwig’s EBIT to be $1.5M and they expect the same earnings annually in perpetuity. The cost of unlevered equity for FI is 7%. Fezziwig has 5M shares outstanding and $4M of debt outstanding. Fezziwig is rated AAA and bondholders demand a yield of 3%. The CFO of Fezziwig, Jacob Marley, believes that the company is under-levered. To increase the leverage, Marley proposes to repurchase 1.2M shares at a price of $2.5 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 38%. What will the stock price be after the repurchase?

Answer rating: 100% (QA)

First we need to find the current value of Fezziwig International FI EBIT 15M Cost of unlevered eq... View the full answer