VanMannen Foundations, Inc. (VF) is a zero-growth company that currently has zero debt, and it has the data shown below. Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
-Refer to the data for VanMannen Foundations, Inc. (VF).What would the stock price be if VF issued the new debt and immediately used the proceeds to repurchase stock?

Question

Quizplus · Accepted Answer

The price per share does not change in the repurchase.
 $\begin{array}{lr}
\text { As a check consider the following data: }\
\text { Value of operations }=\mathrm{EBIT}(1-\mathrm{T}) / \mathrm{WACC}&\$ 533,333\
+\text { value of T-bills }& 0 \
\text { Total value } & \$ 533,333 \
-\text { repurchase } & -213,333 \
\text { Value of equity } & \$ 320,000\
\text { New shares }=\text { old }-\text { Debt/Price }= & \$6, 000\
\text { Stock price }=\text { Equity divided by \# shares }& \$ 53.33
\end{array}$