Assume that WyoOne Corp. recently moved to its optimal capital structure by issu

Question

Assume that WyoOne Corp. recently moved to its optimal capital structure by issuing $5,000mn additional debt and this move resulted in an increase of $1,500mn in firm value. There are 800mn shares outstanding and the current stock price is $19.5. WyoOne corp. intends to buy back shares with the proceeds from debt. Use this information to answer the following questions: a.) At what buy-back price would shareholders be indifferent between selling shares back and holding on to them? b.) If WyoOne Corp. announces a share buyback program at $20.25, are you better of selling the shares back or holding on to them? What should be the price of WyoOne Corp. shares after the buyback?

Explanation / Answer

a)

buy back should be done at premium of = 1500 / 800 = 1.875

Buy back price = 19.5 + 1.875 = 21.375

b)

No as 20.25 is less than breakeven price of 21.375. Better to hold the stock

buyback stocks = 5000 / 20.25 = 246.91 million

remaining shares = 800 - 246.91 = 553.09

share price = 800*19.5 / 553.09 = 28.21

share price = 800*21.375 / 553.09 = 30.92 (including additional value)

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