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

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?

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SOLUTION i A fair repurchase price is the price at which the remaining shareholders will not be worse off after the repurchase This price can be estimated by calculating the weighted average cost of c... View full answer

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