Question

Kurz Manufacturing is currently an​ all-equity firm with 17 million shares outstanding and a stock price of $ 13.00 per share. Although investors currently expect Kurz to remain an​ all-equity firm, Kurz plans to announce that it will borrow $ 63 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 40 % 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

Solution:- Given In Question:-

Shares Otstanding = 17 Million shares

Stock price = $13 per share

Plan to Borrow = $63 Million

Tax Rate = 40%

A. To Calculate market value of​ Kurz's existing assets before the​ announcement-

Market Value of existing Asset (Equity)= Shares Otstanding * Stock price per share

Market Value of existing Asset = 17 Million share * $13

Market Value of existing Asset = $221 Million

B. To Calculate Market value of​ Kurz's assets​ (including any tax​ shields) just after the debt is​ issued, but before the shares are​ repurchased-

Asset = Market Value of existing Asset + Borrowed Amount + Saving In Tax due to Borrowed Amount

Asset = $221 Million + $63 Million + $63 Million * 40%

Asset = $309.2 Million

C. To Calculate Kurz's share price just before the share​ repurchase-

Equity = Asset - Debt

Equity = $309.2 - $63 = $246.2 Million

Share Price =

Share Price = $246.2 Million / 17 Million

Share Price = $14.48

Kurz will Repurchase share =

Repurchase share = $63 Million / $14.48

Repurchase share = 4.35 Million

D. To Calculate Kurz's market value balance sheet and share price after the share​ repurchase-

Assets = Market Value of existing Asset + Saving In Tax due to Borrowed Amount

Assets = $221 Million + $25.2 Million

Assets = $246.2 Million

Debt = $63 Million

Equity = $246.2 - $63 = $183.2

Share Price =

Share Price =

Share Price = $14.48

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