Topsy Breweries Inc, a UK brewer headquartered in Turvey, is all equit

Topsy Breweries Inc, a UK brewer headquartered in Turvey, is all equity financed and generates perpetual annual EBIT of $800. Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.

Topsy has 2,000 shares outstanding which trade for $4.00. The stockholders of Topsy require a return of 7%. Topsy is considering an open market stock repurchase. It plans to buy 15% of its outstanding shares at a price of $4.188. 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 30%. What is the price of Topsy shares after the repurchase (PA)?
A) PA = $4.00
B) PA = $4.05
C) PA = $4.09
D) PA = $4.14
E) PA = $4.19

ANSWER

E