Posted: January 10th, 2017

What will be the market value after the firm announces the news?

Midco Industries wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of £15 per share and no debt. The return on equity of the firm is 20 percent. Midco has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow £100 million on a permanent basis and use the borrowed funds to repurchase outstanding shares. The cost of debt is 10 percent.

• What will be the market value after the firm announces the news?

And how many shares will be repurchased?                                                                                                           [40%]

• After the repurchase, what will be the cost of equity capital and the

firm’s weighted average cost of capital?                                                                                                           [40%]

• Discuss the changes in the cost of equity and weighted average cost of capital based on your answers in (b) and explain the

Modigliani and Miller’s propositions.                                                                                  [20%]

[100% in total]