You are assessing the optimal capital structure for a large publicly traded company with 50 million shares
Question:
You are assessing the optimal capital structure for a large publicly traded company with 50 million shares trading at £58 per share and £850 million in debt outstanding. The firm is in a steady stage growth path and cash flows are expected to grow at 2% per year. It is planning to borrow an additional £1 billion and use the proceeds to buy back stocks. This will take the firm to its optimum capital structure and the current cost of capital of 10% will do down to 9.10% as a result.
i)What would be a fair repurchase price?
ii) Estimate the price of the shares remaining if the firm moves to its optimal capital structure by buying back shares at £62.50 per share.
iii) What is the maximum repurchase price so that the remaining shareholders are not worse off?
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston