Slurp Cola Inc

question 77

Multiple Choice

Slurp Cola Inc.is all equity financed and generates perpetual annual EBIT of $600.Assume that the EBIT,and all other cash flows,occur at year end and that we are currently at the beginning of a year.Assume that Slurp has a 100% payout rate,1,000 shares outstanding,and that shareholders require a return of 6%.Assume that the tax rate is 0%.
Slurp Cola Inc.is considering an open market stock repurchase.It plans to buy 20% of its outstanding shares at the price of $10.00 per share.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 0%.
If Slurp goes ahead with the repurchase,then what is the stock price after the repurchase is complete?

• A) $9.50
• B) $10.00
• C) $10.50
• D) $11.00
• E) $11.50

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Definitions:

Common Stock Dividends Distributable

A liability account representing dividends declared by a company but not yet distributed to common stockholders.

Stock Split

A corporate action to increase the number of outstanding shares by dividing each share, which typically makes the stock more affordable.

Common Stock

A form of corporate equity ownership, representing a claim on a portion of the corporation's assets and earnings.

Stock Dividend

A dividend payment made in the form of additional shares of the company's stock rather than cash.