Cyberdyne Systems generates perpetual annual EBIT of $400. (Assume that the EBIT

Question

Cyberdyne Systems generates perpetual annual EBIT of $400. (Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.) Cyberdyne has 1,300 shares outstanding. The stockholders of Cyberdyne require a return of 11%. Assume that Cyberdyne is initially all-equity financed. It is considering an open market stock repurchase. It plans to buy 25% of its outstanding shares. The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 5%. Assume that the tax rate is 50%. What price does Cyberdyne have to offer for repurchased shares such that the repurchase price is equal to the price that prevails after the repurchase is complete? What is the price per share for Cyberdyne stock prior to the repurchase? What is the cost of the repurchased shares? (This is the amount of money that Cyberdyne will borrow.) If Cyberdyne goes ahead with the repurchase, then what is the value of the company after the repurchase is complete? Note: Don't use the pre-repurchase price to calculate the value of the unlevered firm, because the stock price is rounded to two decimals. What is the stock price after the repurchase is complete?

Explanation / Answer

value of equity firm before repurchase ebit/ required rate of return 3636.364 no of shares 1300 per share price before repurchase 2.797203 no of share repurchased 325 cost of repurchase 909.0909 value of equity after repurchase 2727.273 interest on amount borrowed 2.5% after tax 45.45455 value of debt 1818.182 total value of firm 4545.455 Ebit 400 interest 45.45455 earning after interest 354.5455 tax 50% 177.2727 earning after tax 177.2727 value of equity shares 1611.57 no of shares 975 per share price 1.652893 answer to a 1.652893

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