Answer to Question #11233 in Other Management for Vinod
assume that the firm does buy back stock with the $ 500 million and pays $11/share. Estimate the value per share for the remaining shareholders in the company. (You can assume that it is a zero growth stock in perpetuity)
Now assume that the firm plans to borrow $ 500 million and buy back stock. This will triple the default spread on the debt (both new and existing), estimate the new cost of capital for the firm after the recapitalization.
The cost of capital will decrease.
The value per share for the remaining shareholders in the company will be
$11/(5% - 3.5%) = $733.33
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