Leakey Valves Inc. is all equity financed and generates perpetual annual EBIT of $600. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year. Assume that Leakey Valves has a 100% payout rate, 1,000 shares outstanding, and that shareholders require a return of 6%. Assume that the tax rate is 0%.
Leakey Valves is considering an open market stock repurchase. It plans to buy 20% of its outstanding shares at the price of $10.00 per share. The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 4%. Assume that the tax rate is 0%.
If Leakey Valves goes ahead with the repurchase, then what is the value of the company after the repurchase is complete?
◦ $8,000
◦ $10,000
◦ $12,000
◦ $15,000
◦ $9,000
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