Use the information for the question(s)below.
KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt.KD has had consistently stable earnings,and pays a 21% tax rate.Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.
-After the recapitalization,the total value of KD as a levered firm is closest to:

Question

Quizplus · Accepted Answer

Before the recapitalization, KD Industries has a total market value of 30 million shares * $20 per share = $600 million.
After borrowing $200 million, the total value of the company becomes $600 million + $200 million = $800 million.
With the share repurchase, the number of outstanding shares reduces to:
30 million shares - ($200 million/$20 per share) = 20 million shares.
The new share price can be calculated as follows:
New share price = ($800 million - $0 debt) / 20 million shares
New share price = $40
Therefore, the total value of KD Industries as a levered firm after the recapitalization is $40 per share * 20 million shares = $800 million, which is closest to option C ($642 million).

Use the Information for the Question(s)below