XYZ is an unlevered firm and is currently valued at $820,000. It has 15,000 shares outstanding. As part of a Management Buyout (MBO), XYX is planning to borrow $400,000 from a bank at an annual interest rate of 5.5%. XYZ would repurchase $400,000 worth of stock with the proceeds of the bank loan. The bank agreement stipulates that the debt be repaid according to the following 6-year amortization schedule:
	Beginning				Ending
Year	Balance	Payment	Interest	Principal	Balance
1	400,000.00	80,071.58	22,000.00	58,071.58	341,928.42
2	341,928.42	80,071.58	18,806.06	61,265.52	280,662.90
3	280,662.90	80,071.58	15,436.46	64,635.12	216,027.78
4	216,027.78	80,071.58	11,881.53	68,190.05	147,837.73
5	147,837.73	80,071.58	8,131.08	71,940.50	75,897.23
6	75,897.23	80,071.58	4,174.35	75,897.23	0.00
At the end of year 6, XYZ will issue $200,000 in new debt. The firm plans to keep this debt level in perpetuity.   The current cost of equity is 10% and the corporate tax rate is 35%. If capital markets are efficient, by how much the price per share of Company XYZ would change at the time of the announcement of the MBO?

Answer rating: 100% (QA)

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