Author Question: Reefer Trucking Inc. is expected to generate EBIT of $8 million annually in perpetuity (starting in ... (Read 44 times)

asan beg · **on:** Apr 25, 2021

Reefer Trucking Inc. is expected to generate EBIT of $8 million annually in perpetuity (starting in one year). Reefer is all equity financed and shareholders require a return of 9%. The corporate tax rate is 35%. There are 3 million shares outstanding. Reefer is proposing to borrow $10 million of perpetual debt which it will never increase or repay. The company intends to use the borrowed funds to repurchase shares at a price of $19.26. You are a shareholder in Reefer. When it announces the share buyback, will you offer to sell the company any (all) of your shares?
◦ Yes, I will sell all of my shares. $19.26 is the fair stock price.
◦ Yes, I will sell the same proportion of shares (@16.3%) that the company buys.
◦ No. A repurchase at the pre-announcement price does not affect shareholder wealth.
◦ No. I should wait, because the increase in leverage will raise the stock price above $19.26.

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

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