Rally, Inc., is an all-equity firm with assets worth $30 billion and 13 billion
ID: 2792937 • Letter: R
Question
Rally, Inc., is an all-equity firm with assets worth $30 billion and 13 billion shares outstanding. Rally plans to borrow $10 billion and use funds to repurchase shares.Rally's corporate tax rate is 35%, and Rally plans to keep its outstanding debt equal to $10 billion permanently. a. Without the increase in leverage, what would be Rally's share price? b. Suppose Rally offers $2.43 per share to repurchase its shares. Would shareholders sell for this price? c. Suppose Rally offers $2.70 per share, and shareholders tender their shares at this price. What will be Rally's share price after the repurchase? d. What is the lowest price Rally can offer and have shareholders tender their shares? What will be its stock price after the share repurchase in that case?
Explanation / Answer
a)
Share price = 30 /13 = 2.31
b)
Before share purchase
Equity = 30 + 35%*10 = 33.5
Share price = 33.5 / 13 = 2.58
Share holders will not sell for 2.43
c)
After repuchase
E = 30 + 35%*10 -10 = 23.5
Purchased shares = 10/2.7 = 3.7037
Remaining shares = 13 - 3.7037 = 9.2963
Share price = 23.5 / 9.2963 = 2.5279 per share
d)
Calculated in part b
Fair value = 2.58
this is the lowest that shareholders will tender, and after repuchase also price will be same 2.58
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