Question

Kurz Manufacturing is currently an​ all-equity firm with

37

million shares outstanding and a stock price of

$11.50

per share. Although investors currently expect Kurz to remain an​ all-equity firm, Kurz plans to announce that it will borrow

$65

million and use the funds to repurchase shares. Kurz will pay interest only on this​ debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a

38%

corporate tax rate.  

a. What is the market value of​ Kurz's existing assets before the​ announcement?

b. What is the market value of​ Kurz's assets​ (including any tax​ shields) just after the debt is​ issued, but before the shares are​ repurchased?

c. What is​ Kurz's share price just before the share​ repurchase? How many shares will Kurz​ repurchase?

d. What are​ Kurz's market value balance​ sheet, and share price after the share​ repurchase?

Answer 1

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