Wilson Inc uses bonds and common shares to finance its investments and operations. The firm's debt consists of 20,000 bonds that are currently trading at a price of $1,038.75 each ($20,775,000 debt).
Wilson's debt level is a fixed perpetuity and the risk of the tax shield is the same as the risk of the debt. Wilson's 500,000 common shares are currently trading at a price of $48.85 each. The company's average tax rate is 38%.
a) Ignoring distress costs, determine the price per share of Wilson Inc if it were all equity financed, i.e. if its debt was retired by issuing new equity.
b) How will the answer to part (a) change if the tax rate drops to 19%?