solution

Truckin’ Transportation Inc. (TT) generates perpetual annual EBIT of $500. (Assume that the EBIT, and all other cash flows, occur at year end and that we are currently at the beginning of a year.) TT has 1,000 shares outstanding. The stockholders of TT require a return of 9%. Assume that TT is initially all-equity financed. It is considering an open market stock repurchase. It plans to buy 20% of its outstanding shares at the price that prevails prior to the repurchase (under the all-equity capital structure). The repurchased shares will be cancelled. It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 3%. Assume that the tax rate is 40%. Answer the questions that follow.

What is the price per share for TT stock prior to the repurchase? (Round your answer to two decimals.)

What is the stock price after the repurchase is complete? (Round your answer to two decimal places.)

Now assume that debt increases the probability of financial distress. Assume that the present value of distress costs is $160. What is the stock price after the repurchase including the costs of financial distress? (Round your answer to the nearest whole dollar.)