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What price should marley offer in the repurchase

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Fezziwig International (FI), the world's largest manufacturer of snuff, has been in business since 1869. At the end of the current year, analysts expect Fezziwig's EBIT to be $1.75M and they expect the same earnings annually in perpetuity. The cost of unlevered equity for FI is 8%. Fezziwig has 5M shares outstanding and $4M of debt outstanding. Fezziwig is rated AAA and bondholders demand a yield of 3%. The CFO of Fezziwig, Jacob Marley, believes that the company is under-levered. To increase the leverage, Marley proposes to spend $4M to repurchase shares. The repurchase will be financed by additional borrowing. The corporate tax rate is 38%. What price should Marley offer in the repurchase so that the post-repurchase stock price is the same as the repurchase price?

Reference no: EM133112686

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