Wally's Widgets International (WWI)is the World's Largest Manufacturer of Widgets

question 105

Multiple Choice

Wally's Widgets International (WWI) is the world's largest manufacturer of widgets.At the end of the current year,analysts expect WWI's EBIT to be $2M and they expect the same earnings annually in perpetuity.WWI's shareholders require a return of 10% and there are 5M common shares outstanding.WWI has debt with a total face value of $5M.The bonds have an annual coupon of 5%,are rated AAA and yield 5%.The CFO of WWI believes that the company is under-levered.To increase the leverage,the CFO proposes to repurchase 1M shares at a price of $1.50 per share.The repurchase will be financed by additional borrowing.The corporate tax rate is 40%.What is the value of the company prior to the repurchase,and what is the stock price after the repurchase?

• A) Value (prior) = $14M; Stock price (after) = $2.03
• B) Value (prior) = $12M; Stock price (after) = $2.03
• C) Value (prior) = $14M; Stock price (after) = $1.62
• D) Value (prior) = $12M; Stock price (after) = $1.62
• E) Value (prior) = $14M; Stock price (after) = $3.65

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Definitions:

Minority Cultural Groups

Social groups that share distinct cultural traditions and are smaller in number within a larger population or society.

Dominant Culture

the prevailing cultural practices, beliefs, and values of the majority group within a society, which can influence social norms and policies.

System Maintenance

The process of keeping an organization or technical system operating smoothly through regular check-ups, updates, and repairs.

Enhancement Role

Refers to activities or positions that contribute to improving or augmenting the performance, status, or condition of something or someone.