Please answer the questions below, based on the provided scenario. 1. How many s
ID: 2783950 • Letter: P
Question
Please answer the questions below, based on the provided scenario.
1. How many shares will the company repurchase as a result of the debt issue? (minimum 100 words)
2. How many shares of common stock will remain after the repurchase? (minimum 100 words)
Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower, Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. The tax rate is 35%.
Explanation / Answer
I'll not write the complete answer for you. In 100 words, you've to write yourself.
1. The bonds are sold at par. No par value however is given. Hence it's safe to assume that par value for both bond and shares are same. Price of one share = 7,500,000/400,000= $18.75. If bonds are offered at $18.75 then no. Of bonds sold = 2,000,000/18.75= 106,666.67. Therefore number of shares to be repurchased is 106,667.
2. Shares remaining = 400,000-106,667= 389,333