Question

Hawar International is a shipping firm with a current share price of $5.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $20 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement

Answer 1

New share price = $6.1

Step-by-step explanation:

DATA

The Current share price $5.50

Outstanding shares $10m

borrowing shares $20m

Corporate tax rate 30%

Required: share price be after this announcement?

Formula:

New share price = tax rate x (
`(borrowing shares)/(Outstanding shares)`) + current share price

Solution:

New share price = 30% x (
`(20m)/(10m)`) + $5.5

New share price = 0.6 x $5.5

New share price = $6.1