(12 pts) 2. Firm A currently has no debt in its capital structure (i.e., an all-equity firm). The stock of the firm is t

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12 Pts 2 Firm A Currently Has No Debt In Its Capital Structure I E An All Equity Firm The Stock Of The Firm Is T 1 (86.03 KiB) Viewed 85 times

(12 pts) 2. Firm A currently has no debt in its capital structure (i.e., an all-equity firm). The stock of the firm is trading at $75 per share. The firm has 150 million shares outstanding. The company is considering leveraged recapitalization. Under the recapitalization plan, the firm would issue $3 billion perpetual debt and use the entire amount to repurchase an equivalent value of outstanding shares. The firm would issue the debt at par. The before-tax cost of debt is 7%. The firm's tax rate is 25 percent. Assume that the share price fully reflects the value of the debt financing immediately after the plan is announced. Ignore bankruptcy costs, transaction costs, and signaling, incentive, clientele, and other effects. a) Use the adjusted present value (APV) approach to find the stock price per share after the leveraged recapitalization plan is announced. b) How many shares will be repurchased using the $3 billion debt issue? What is the number of shares outstanding after the share repurchase? Assume that the firm repurchases shares soon after the debt financing announcement and that the announcement is the only news about the company at the time. c) Find the market value weight of debt (as % of total capital) and market value weight of equity (as % of total capital) after the recapitalization with share repurchase.