Wally's Widgets International (WWI) is the world's largest manufacturer of widgets. At the end of the current year, analysts expect WWI's EBIT to be $2M and they expect the same earnings annually in perpetuity. WWI's shareholders require a return of 10% and there are 5M common shares outstanding. WWI has debt with a total face value of $5M. The bonds have an annual coupon of 5%, are rated AAA and yield 5%. The CFO of WWI believes that the company is under-levered. To increase the leverage, the CFO proposes to repurchase 1M shares at a price of $1.50 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 40%. What is the value of the company prior to the repurchase, and what is the stock price after the repurchase?
◦ Value (prior) = $15.5M; Stock price (after) = $2.40
◦ Value (prior) = $12.5M; Stock price (after) = $2.03
◦ Value (prior) = $14.5M; Stock price (after) = $1.62
◦ Value (prior) = $12.5M; Stock price (after) = $1.62
◦ Value (prior) = $14.5M; Stock price (after) = $3.65
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