EnviroStyro Inc

question 75

Multiple Choice

EnviroStyro Inc.is all equity financed and generates perpetual annual EBIT of $750.Assume that the EBIT,and all other cash flows,occur at year end and that we are currently at the beginning of a year.EnviroStyro has 1,500 shares outstanding which trade for $3.611.The stockholders of EnviroStyro require a return of 9%.EnviroStyro is considering an open market stock repurchase.It plans to buy 15% of its outstanding shares at a price of $3.811.The repurchased shares will be cancelled.It will finance the repurchase by issuing perpetual bonds with a coupon rate (and yield) of 5%.Assume that the tax rate is 35%.What is the price of EnviroStyro shares after the repurchase (P_A) ?

• A) P_A = $3.61
• B) P_A = $3.66
• C) P_A = $3.71
• D) P_A = $3.76
• E) P_A = $3.81

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