Author Question: Derek's Dinghies and Rafts (DDR) is the world's largest manufacturer of rowboats and rafts. At the ... (Read 41 times)

SAVANNAHHOOPER23 · **on:** Apr 25, 2021

Derek's Dinghies and Rafts (DDR) is the world's largest manufacturer of rowboats and rafts. At the end of the current year, analysts expect DDR's EBIT to be $2M and they expect the same earnings annually in perpetuity. DDR's shareholders require a return of 12.5% and there are 5M common shares outstanding. DDR has debt with a total face value of $5M. The bonds have an annual coupon of 3%, are rated AAA and yield 3%. The CFO of DDR believes that the company is under-levered. To increase the leverage, the CFO proposes to repurchase 1.2M shares at a price of $1.25 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) = $9.6M; Stock price (after) = $1.50
◦ Value (prior) = $9.6M; Stock price (after) = $1.14
◦ Value (prior) = $13.9M; Stock price (after) = $2.10
◦ Value (prior) = $11.6M; Stock price (after) = $1.14
◦ Value (prior) = $11.6M; Stock price (after) = $3.21

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

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