KD Industries has 30 million shares outstanding with a market price of $20 per s

Question

KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. After the recapitalization, the value of KD's levered equity is closest to __________. (Points : 10)

    $670 million
      $400 million
      $330 million
      $470 million

Explanation / Answer

Hi,

Please find the answer as follows:

Value of KD's levered equity = 30 * 20 + .35*200 - 200 = 470 million

Thanks.

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