Problem:
Kurz Manufacturing is currently an all-equity firm with 30M shares outstanding and a stock price of $12.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow $100M and use the funds to repurchase shares. Kurz will pay interest only on this debt, and it has no further plans to increase or decrease this amount of debt. Kurz is subject to a 40% corporate tax rate.
Required:
Question 1: What is the market value of Kurz's existing assets before the announcement?
Question 2: What is the market value of Kurz's assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?
Question 3: What is Kurz's share price just before the share repurchase? How many shares will Kurz repurchase?
Question 4: What are Kurz's market values of debt, equity, and assets and share price after the repurchase?
Note: Provide support for rationale.