Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15...

Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15 per share. Now Zemma Corp will change its capital structure by issuing 100 million in debt. The 100 raised by the issue will be used to buyback shares at a fair price. Assume that debt will be permanent debt and that the appropriate cost of debt will be 5%. The current tax rate is 40%.

A. Before the transaction, what is the market value of the equity today? And what will be the new total firm value when the recap is announced?

B. What will be the new share price when the recap is announced?

C. At the conclusion of this transaction, How many shares outstanding will Gemma Mine corp have?

D. At the conclusion of this transaction, what will be the debt to equity ratio?

Expert Solution

jeff jeffy answered 1 year ago

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