Roy’s Toys, Inc. is currently an all-equity firm with 2 million shares of outstanding equity and stock price of $10 per share. Its unlevered cost of equity is 12%. The firm is contemplating a restructuring that would involve issuing $5 million in debt and using all the proceeds to repurchase outstanding equity. The debt would have an interest rate of 8% and equity would be repurchased at $10 per share. Assume that markets are perfect (no taxes, no bankruptcy, ect)
(show your work)
a. How many shares will be repurchased?
b. What will be Roy’s cost of equity after this restructuring?