AHN is firm manufacturer. The firm is all-equity financed and has 40 million shares outstanding at...

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AHN is firm manufacturer. The firm is all-equity financed andhas 40 million shares outstanding at a price of $75 per share. AHNcurrent cost of capital is 7.5%. The firm is considering to buyback $400 million in shares in the open market and to finance therepurchase by issuing bonds. AHN plans to maintain this capitalstructure indefinitely. At this level of debt, the bonds would beA-rated, and the firm would pay an interest rate of 4.5%.AHN's -marginal corporate tax rate is 25%. With this information answerthe following questions.
(iii) Now suppose that the stock price upon announcement of theshare repurchase plan equals $77.90. If we assume that the marketis efficient, and the firm has not released any other information,what can you infer from this regarding the market’s assessment ofAHN’s cost of financial distress, and how would you estimate thesecosts? Motivate your approach and discuss the inputs in anycalculations.

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To calculate the financial distress Find the weighted average cost of debt in distress financialconditionSubtract the calculated weighted average cost of debt from costof debt at Aratedfind the dollar value by multiplying the See Answer

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AHN is firm manufacturer. The firm is all-equity financed andhas 40 million shares outstanding at a price of $75 per share. AHNcurrent cost of capital is 7.5%. The firm is considering to buyback $400 million in shares in the open market and to finance therepurchase by issuing bonds. AHN plans to maintain this capitalstructure indefinitely. At this level of debt, the bonds would beA-rated, and the firm would pay an interest rate of 4.5%.AHN's -marginal corporate tax rate is 25%. With this information answerthe following questions.(iii) Now suppose that the stock price upon announcement of theshare repurchase plan equals $77.90. If we assume that the marketis efficient, and the firm has not released any other information,what can you infer from this regarding the market’s assessment ofAHN’s cost of financial distress, and how would you estimate thesecosts? Motivate your approach and discuss the inputs in anycalculations.