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    Market value of assets, share price, repurchase amount, cost of capital

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    WM has 25 million shares outstanding. Shares are trading at $8.00. WM management plans to raise $60 million to by issuing debt to repurchase shares. Suppose that WM is an all equity firm before the debt issue, it is subject to 36% corporate tax rate, its cost of debt is 5% and equity cost of capital is 10%.

    a. What is the WM's market value of assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?

    b. What is WM's share price just before the share repurchase?

    c. How many shares will WM repurchase?

    d. What are the WM's share price after the share repurchase?

    e. What is the WM's pretax weighted cost of capital after the share repurchase?

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    Solution Preview

    a) Value of the firm after debt issue but before repurchase = Value of all equity firm + Value of tax shield + Value of debt
    =25 million * $8.00 + 60 million*36% + 60 million=$281.6 million

    b) market Value of debt = $60 million
    market value of the firm = ...

    Solution Summary

    Market value of assets, share price, repurchase amount and cost of capital are examined for WM`s market.