Reference no: EM133060001

XYZ is an unlevered firm and is currently valued at $820,000. It has 15,000 shares outstanding. As part of a Management Buyout (MBO), XYX is planning to borrow $400,000 from a bank at an annual interest rate of 5.5%. XYZ would repurchase $400,000 worth of stock with the proceeds of the bank loan. The bank agreement stipulates that the debt be repaid according to the following 6-year amortization schedule:

Beginning Ending Year Balance Payment Interest Principal Balance

1 400,000.00 80,071.58 22,000.00 58,071.58 341,928.42

2 341,928.42 80,071.58 18,806.06 61,265.52 280,662.90

3 280,662.90 80,071.58 15,436.46 64,635.12 216,027.78

4 216,027.78 80,071.58 11,881.53 68,190.05 147,837.73

5 147,837.73 80,071.58 8,131.08 71,940.50 75,897.23

6 75,897.23 80,071.58 4,174.35 75,897.23 0.00

At the end of year 6, XYZ will issue $200,000 in new debt. The firm plans to keep this debt level in perpetuity. The current cost of equity is 10% and the corporate tax rate is 35%. If capital markets are efficient, by how much the price per share of Company XYZ would change at the time of the announcement of the MBO?