Posted: January 10th, 2017
Midco Industries wants to boost its stock price. The company currently has 20 million shares outstanding with a market price of £15 per share and no debt. The return on equity of the firm is 20 percent. Midco has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow £100 million on a permanent basis and use the borrowed funds to repurchase outstanding shares. The cost of debt is 10 percent.
And how many shares will be repurchased? [40%]
firm’s weighted average cost of capital? [40%]
Modigliani and Miller’s propositions. [20%]
[100% in total]
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