Part $4$

Task #$1($Leveraged recapitalization with taxes$).$ 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 $21\%,$ 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\mathrm{.}60$ per share to repurchase its shares. Would shareholders sell for

this price?

c$)$ Suppose Rally offers $$3\mathrm{.}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?