EnviroStyro Inc is all equity financed and generates perpetual annual

EnviroStyro Inc is all equity financed and generates perpetual annual EBIT of $750. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.

EnviroStyro has 1,500 shares outstanding which trade for $3.611. The stockholders of EnviroStyro require a return of 9%. EnviroStyro is considering an open market stock repurchase. It plans to buy 15% of its outstanding shares at a price of $3.811. The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 5%. Assume that the tax rate is 35%. What is the price of EnviroStyro shares after the repurchase (PA)?
A) PA = $3.61
B) PA = $3.66
C) PA = $3.71
D) PA = $3.76
E) PA = $3.81

ANSWER

E