Question

Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.


Assuming perfect capital markets, the share price for BBB after this announcement is closest to:

Group of answer choices

$11.40

$10.85

$10.00

$8.60

Answer 1

Solution:-

Share capital = Market price per share * number of shares

Share capital = $10*25= $250 million

Value of the share ( VL) = share capital ( VU) + corporate tax on debt

Value of the share ( VL) = $250 million + 35% * 100 million

Value of the share ( VL) = $285 million

Share price =$285 million /25 million = $11.40

Option a is correct I.e. $11.40