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Problem 1: Bravos currently has a share price of $35 and 20 million shares outstanding. In addition, the firm currently has $120 million in debt and no excess cash. The firm is planning on conducting a levered recapitalization. As part of this transaction, the firm plans on issuing an additional $100 million of debt in the form of a perpetual bond to repurchase shares (i.e. the full $100 million will be paid out to shareholders by repurchasing shares). The cost of debt on the perpetual bond will be 5.5%. Bravos has an unlevered cost of capital of 12% and a marginal corporate tax rate of 20%. Using the APV method, calculate the share price of Bravos after the levered recapitalization.
Select one.
I. $35
II. $30
III. $36
IV. $31
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