(3) What are the total cost and the unit cost of the completed job?
January 11, 2018
The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?
January 11, 2018

 How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?

Hightower, Inc. plans to announce the issuance of $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Our organization is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, we will maintain the new capital structure indefinitely. Currently our organization generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity and the tax rate is 35%. With this said, the following points are offered in consideration of the financial impact of this decision:

Question: What is the company’s stock price per share immediately after the repurchase announcement?

Question: How many shares will the company repurchase as a result of the debt issue? How many shares of common stock will remain after the repurchase?

 

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