solution

At the end of the current year, analysts expect Lucas Corporation’s EBIT to be $12.5M and they expect the same earnings annually in perpetuity. The cost of unlevered equity for the company is 12.5%. The company has 5M shares outstanding and $40M of debt outstanding. The company is rated AAA and bondholders demand a yield of 5%. The management of the company believes that the company is under-levered. To increase the leverage, the management proposes to repurchase 0.5M shares at a price of $8.5 per share. The repurchase will be financed by additional borrowing. The corporate tax rate is 38%.

What will the stock price be after the repurchase?

Answer rounding to the nearest cent. Do not include any symbols, such dollar sign ($), percentage sign (%), or thousand separators (,). For example, if the answer is 12.3456, enter 12.35.

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