This post addresses share price.
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Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.
Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assuming that capital markets are perfect except for the existence of corporate taxes, the share price for BBB after this announcement is closest to:
A. $8.60
B. $10.00
C. $11.40
D. $10.85
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Solution Summary
The solution provides the correct answer with supporting calculations to determine the correct share price for BBB.
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