MJ Enterprises Has 50 Million Shares Outstanding with a Market

question 2

Essay

MJ Enterprises has 50 million shares outstanding with a market price of $25 per share and no debt.MJ has had consistently stable earnings,and pays a 35% tax rate.Management plans to borrow $500 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.Calculate MJ's share price following announcement of the recapitalization plan.

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Definitions:

Average Fixed Cost

The total fixed costs of production divided by the quantity of output produced.

Spreading

The act of extending or distributing something over a wider area or among a larger number of people.

Overhead

Fixed costs that are not directly tied to production levels, such as rent, utilities, and administrative expenses, affecting a company's profitability.

Variable Costs

Expenses that change in proportion to the activity of a business, such as costs for raw materials or production volume.