Alright,

I have a question, imagine an all equity firm that is 140 million in value and has 4million in common shares.... so share price is $35. The company is thinking of a plan to issue 60million dollars of debt and pay it out as dividends, debt is perpetual at 8%. Assuming a semi-strong efficient market. 30% tax rate

questions are

a)Value of shares before announcement? $35 obviously...

the others are a bit more tricky

b) Value of the share after the announcement: I got $39.5

c) Value of the share after the plan is put into action and after dividends have already been announced.

I got $24.5 for this, assuming that 60 million / 4 million = $15 / share so after u pay the dividend the price would decline by $15. Does this make any sense?



What perplexes me is using the MM formulas, i calculate that the levered firm will = 140M * (.3)(6) = 158M....

im not quite sure exactly what the value of equity will be after the dividends are paid out. I assumed that although you pay out all the debt of 60M, it is still part of the value of ur firm, meaning if ur overall value is 158M, then the value of ur debt after u pay the dividends and is still 60M, and ur EQUITY value goes down to 98M, does this make sense? Or is equity still valued at 140M?

this is really bugging me. thanks!