Zara plc is planning to repurchase part of its ordinary share equity by issuing corporate debt....

 

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Zara plc is planning to repurchase part of its ordinary share equity by issuing corporate debt. As a result, the firm's debt-equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has 1,800,000 worth of debt outstanding. The cost of this debt is 6 percent per year. Zara expects to have an EBIT of 783,000 per year in perpetuity. Zara pays no taxes. Assume MM propositions hold in this case. (a) What is the market value of Zara plc before and after the repurchase announcement? (b) What is the expected return on the firm's equity before the announcement of the share repurchase plan? (c) What is the expected return on the equity of an otherwise identical all-equity firm? Zara plc is planning to repurchase part of its ordinary share equity by issuing corporate debt. As a result, the firm's debt-equity ratio is expected to rise from 40 percent to 50 percent. The firm currently has 1,800,000 worth of debt outstanding. The cost of this debt is 6 percent per year. Zara expects to have an EBIT of 783,000 per year in perpetuity. Zara pays no taxes. Assume MM propositions hold in this case. (a) What is the market value of Zara plc before and after the repurchase announcement? (b) What is the expected return on the firm's equity before the announcement of the share repurchase plan? (c) What is the expected return on the equity of an otherwise identical all-equity firm?

Answer rating: 100% (QA)

a Before repurchase announcement Debt 1800000 Debt ratio 40 Equity ratio ... View the full answer