Company currently has a debt-equity ratio of 1/5. The stock price is $70 and there are 150,000 shares outstanding. The CFO is proposing a recapitalization plan to borrow $2,500,000 and use the proceeds to buy back shares. They can borrow at 5% and their tax rate is 40%.
Based on this information, please fill in the following blanks.
1. The annual interest expense for the $2,500,000 debt is $
2. The annual interest tax shield for the $2,500,000 debt is $
3. The present value of the interest tax shield for the $2,500,000 debt is $
4. The market value of the existing debt before the repurchase announcement is $
5. The market value of the TOTAL debt after the repurchase has taken place is $
6. The market value of the equity before the repurchase announcement is $
7. The market value of the equity after the repurchase has taken place is $
8. The number of shares repurchased is (round to the nearest integer please)
9. The share price per share after the repurchase has been announced (use 2 digits after the decimal please) $
10. The hypothesis which explains the immediate reaction of the stock price to the repurchase announcement is called the
hypothesis.