GloboCorp is all equity financed and generates perpetual annual EBIT o

GloboCorp is all equity financed and generates perpetual annual EBIT of $100. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.

GloboCorp has 1,500 shares outstanding which trade for $0.40. The stockholders of GloboCorp require a return of 10%. GloboCorp is considering an open market stock repurchase. It plans to buy 20% of its outstanding shares. The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 4%. Assume that the tax rate is 40%. What price does GloboCorp have to offer for repurchased shares such that the repurchase price is equal to the price that prevails after the repurchase is complete?
A) $0.4232
B) $0.4348
C) $0.5137
D) $0.5435
E) $0.4554

ANSWER

B