GloboCorp Is All Equity Financed and Generates Perpetual Annual EBIT

question 108

Multiple Choice

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

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Definitions:

Stimulus Generalization

The tendency for the conditioned response to be evoked by stimuli that are similar to the conditioned stimulus in classical conditioning.

Higher-Order Conditioning

In classical conditioning, a procedure in which a neutral stimulus becomes a conditioned stimulus through association with an already established conditioned stimulus.

Spontaneous Recovery

Spontaneous recovery is a phenomenon in psychology where a previously extinguished response re-emerges after a period of no exposure to the conditioned stimulus.

Little Albert

An early 20th-century experiment in psychology demonstrating classical conditioning by inducing a fear response in a young child to previously neutral stimuli.