Question

Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement

Answer 1

Answer:

New share price = $6.1

Explanation:

DATA

The Current share price                  $5.50

Outstanding shares                         $10m

borrowing shares                             $20m

Corporate tax rate                            30%

Required: share price be after this announcement?

Formula:

New share price = tax rate x ($\frac{borrowing shares}{Outstanding shares}$) + current share price

Solution:

New share price = 30% x ($\frac{20m}{10m}$) + $5.5

New share price =  0.6 x $5.5

New share price = $6.1