Company A is currently all-equity financed with 100 million shares. The EBIT will be 30 million in year1 and growing at 3% per year forever. The company always has a 40% corporate tax. The investorsdiscount cash flows from similar projects at 18% per year.Now, the company takes a 50-million loan to make distributions to the shareholders. The interest rateon the loan is 5%. There will be no principal repayments made until the loan is paid back in full in year5. Due to financial distress, 30% of Company A’s EBITs will be lost while it carries the 50-million debt.Capital gain tax is zero and dividend tax is 25%.a. If Company A announces that it will use the 50 million to repurchase shares, what will be the priceright after the share repurchase? What is the price right after the announcement?b. If Company A announces that it will use the 50 million to make a one-time dividend payout, what willbe the price right after the dividend payout? What is the price right after the announcement?
Company A is currently all-equity financed with 100 million shares. The EBIT will be 30 million in year
1 and growing at 3% per year forever. The company always has a 40% corporate tax. The investors
discount cash flows from similar projects at 18% per year.
Now, the company takes a 50-million loan to make distributions to the shareholders. The interest rate
on the loan is 5%. There will be no principal repayments made until the loan is paid back in full in year
5. Due to financial distress, 30% of Company A’s EBITs will be lost while it carries the 50-million debt.
Capital gain tax is zero and dividend tax is 25%.
a. If Company A announces that it will use the 50 million to repurchase shares, what will be the price
right after the share repurchase? What is the price right after the announcement?
b. If Company A announces that it will use the 50 million to make a one-time dividend payout, what will
be the price right after the dividend payout? What is the price right after the announcement?
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