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.
-How many shares will KD repurchase in the recapitalization if the share price increases upon announcement and before the recapitalization?

Question

Quizplus · Accepted Answer

KD Industries plans to borrow $200 million to repurchase outstanding shares. Since KD has no debt initially, this amount will be added to its capital structure, making it leveraged. The new capital structure will be as follows:
Equity Value = $20 x 30 million shares = $600 million
Debt Value = $200 million
Total Value = Equity Value + Debt Value = $800 million
The new shares outstanding after the repurchase can be calculated as follows:
New Shares Outstanding = Equity Value / New Price per share
Assume the share price increases to $24 upon announcement and before the recapitalization, then
New Shares Outstanding = $600 million / $24 = 25 million shares
KD will repurchase (30 million - 25 million) = 5 million shares with $200 million borrowed funds. Therefore, the total no of shares repurchased will be 
5 million x (24/20) = 6 million shares
Hence, KD will repurchase 9.35 million shares. Option D is the correct answer.

Use the Information for the Question(s)below