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Problem: REC Corp. has 30 million shares outstanding with a market price of $20 per share and no debt. REC has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.
Required:
Question 1: Calculate the value of REC's unlevered equity.
Question 2: Calculate REC's enterprise value after the recapitalization plan is announced.
Question 3: Calculate the price at which the shares are repurchased.
Question 4: Calculate the value of REC's equity and the number of shares outstanding after the recapitalization.
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