Adam & Eve Inc. is a multinational firm that runs a global chain of for-profit blood banks, and is dual-headquartered out of both Tangiers and Detroit. The firm has a current share price of $26.09 and 21.0 million shares outstanding. The firm pays corporate tax at a rate of 40.0%. Suppose that Adam & Eve plans to lower its corporate taxes by issuing $121.6 million worth of bonds at par and using it to repurchase shares. Shareholders expect that the change in debt is going to be permanent, such that the firm will make constant annual coupon interest payments at a rate of 4.8% per annum for the foreseeable future. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) What is your best estimate of the value of each share of Adam & Eve Inc. after the firm announces the proposed leveraged recapitalization? That is, what price should investors now be willing to pay for shares of the company? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) Now in addition to the presence of corporate taxation, suppose that financial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $27.56 per share after the firm announced the leveraged recapitalization. In today's dollars, how much does the market believe that the financial distress costs caused by this additional debt is worth? That is, what present value of financial distress costs do investors believe Adam & Eve will incur as a result of becoming levered with the proposed level of debt financing? The PV of the financial distress costs caused by issuing the debt must be $ million. (Round your answer to 2 decimal places)
Adam & Eve Inc. is a multinational firm that runs a global chain of for-profit blood banks, and is dual-headquartered out of both Tangiers and Detroit. The firm has a current share price of $26.09 and 21.0 million shares outstanding. The firm pays corporate tax at a rate of 40.0%. Suppose that Adam & Eve plans to lower its corporate taxes by issuing $121.6 million worth of bonds at par and using it to repurchase shares. Shareholders expect that the change in debt is going to be permanent, such that the firm will make constant annual coupon interest payments at a rate of 4.8% per annum for the foreseeable future. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) What is your best estimate of the value of each share of Adam & Eve Inc. after the firm announces the proposed leveraged recapitalization? That is, what price should investors now be willing to pay for shares of the company? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) Now in addition to the presence of corporate taxation, suppose that financial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $27.56 per share after the firm announced the leveraged recapitalization. In today's dollars, how much does the market believe that the financial distress costs caused by this additional debt is worth? That is, what present value of financial distress costs do investors believe Adam & Eve will incur as a result of becoming levered with the proposed level of debt financing? The PV of the financial distress costs caused by issuing the debt must be $ million. (Round your answer to 2 decimal places)
Chapter2: The Domestic And International Financial Marketplace
Section2.A: Taxes
Problem 6P
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6
Transcribed Image Text:Adam & Eve Inc. is a multinational firm that runs a global chain of for-profit blood
banks, and is dual-headquartered out of both Tangiers and Detroit. The firm has a
current share price of $26.09 and 21.0 million shares outstanding. The firm pays
corporate tax at a rate of 40.0%.
Suppose that Adam & Eve plans to lower its corporate taxes by issuing $121.6
million worth of bonds at par and using it to repurchase shares. Shareholders
expect that the change in debt is going to be permanent, such that the firm will
make constant annual coupon interest payments at a rate of 4.8% per annum for
the foreseeable future.
Assume that the only capital market imperfection is the presence of corporate
taxes (i.e. there are no costs of financial distress, agency costs, etc.).
A) What is your best estimate of the value of each share of Adam & Eve Inc. after
the firm announces the proposed leveraged recapitalization? That is, what price
should investors now be willing to pay for shares of the company?
The share price should change to $
per share when the firm
announces the recapitalization.
(Round your answer to 2 decimal places. Use the unrounded value in any
subsequent calculations that require it)
Now in addition to the presence of corporate taxation, suppose that financial
distress (i.e. bankruptcy costs) are another possible capital market imperfection.
B) Assume that the share price actually rose to $27.56 per share after the firm
announced the leveraged recapitalization.
In today's dollars, how much does the market believe that the financial distress
costs caused by this additional debt is worth? That is, what present value of
financial distress costs do investors believe Adam & Eve will incur as a result of
becoming levered with the proposed level of debt financing?
The PV of the financial distress costs caused by issuing the debt must be $
million.
(Round your answer to 2 decimal places)
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