Problem
Due to the new order discussed, the Chairman of the Board, CEO and President of the company all think that the value of the company's equity will rise substantially. They are in favor of using the company's ability to borrow funds to repurchase outstanding shares of common stock. Their target is to repurchase 25% of the company's outstanding common equity. This would be in addition to the company's proposed borrowing to finance this new and very large order. If the common is trading at $ 20 and they all believe that the common will rise to $ 40 per share over the next year given the company's fundamentals and the current condition of the US equity market, how do you feel about this strategy given the following: A) You believe that IF the company's debt/equity ratio rises to 3, the company's ability to borrow will be suspended. B) You have some concerns that the company's WACC could rise to a level that would concern the company's lending bank. Recalculate the company's WACC given the two proposed borrowings. And then calculate the WACC based on the much higher share price. What would you suggest doing?