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DFS Corporation is currently an all-equity firm, with assets with a market value of $100 mil- lion 1 answer below » DFS Corporation is currently an all-equity firm, with assets with a market value of $100 mil- lion and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permanent debt (i.e., the outstanding principal will remain constant) and use the proceeds to repurchase shares. DFS pays a 35% corporate tax rate, so one motivation for taking on the debt is to reduce the firm’s tax liability. However, the upfront View complete question » DFS Corporation is currently an all-equity firm, with assets with a market value of $100 mil- lion and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permanent debt (i.e., the outstanding principal will remain constant) and use the proceeds to repurchase shares. DFS pays a 35% corporate tax rate, so one motivation for taking on the debt is to reduce the firm’s tax liability. However, the upfront investment banking fees associated with the recapitalization will be 5% of the amount of debt raised. Adding leverage will also create the possibility of future financial distress or agency costs; shown below are DFS’s estimates for different levels of debt: Debt amount ($ million): 0 10 20 30 40 50 Present value of expected distress and agency costs ($ million): 0.0 – 0.3 – 1.8 – 4.3 – 7.5 – 11.3 Based on this information, which level of debt is the best choice for DFS? Estimate the stock price once this transaction is announced. View less » Sep 17 2015 01:55 PM
