(i) ABC plc is an unlevered firm with expected annual earnings before taxes of 35...
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Finance
(i) ABC plc is an unlevered firm with expected annual earnings before taxes of 35 million in perpetuity. The current required return on the firms equity is 20%. The firm distributes all of its earnings as dividends at the end of each year. There is a corporate tax rate of 28%. The company has 1.5 million ordinary shares outstanding. Calculate the value of the firm and the price per share (10 marks)
(ii) Based on information given in (i), ABC plc. is planning a recapitalisation under which it will issue $40 million of perpetual 9% debt and use this proceeds to buy back its shares. Use the Adjusted Present Value (APV) method to calculate the company value after the recapitalisation. What is the value of equity after the announcement of the recapitalisation and the price per share? (10 marks)
(iii) Based on information in (i) and (ii), calculate the number shares to be repurchased, the value of equity after the repurchase has been completed, and the price per share after the completion of the recapitalisation. (10 marks)
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