Author Question: Omnicorp is all equity financed and generates perpetual annual EBIT of $500. Assume that the EBIT, ... (Read 93 times)

laurencescou · **on:** Apr 25, 2021

Omnicorp is all equity financed and generates perpetual annual EBIT of $500. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year. Omnicorp has 1,000 shares outstanding which trade for $3.125. The stockholders of Omnicorp require a return of 8%. Omnicorp is considering an open market stock repurchase. It plans to buy 20% of its outstanding shares. The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 2%. Assume that the tax rate is 50%. What price does Omnicorp have to offer for repurchased shares such that the repurchase price is equal to the price that prevails after the repurchase is complete?
◦ $3.14
◦ $3.44
◦ $3.91
◦ $4.34
◦ $4.13

AISCAMPING · **Reply #1 on:** Apr 25, 2021

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