## Rationality and Stock Price Effects

Assume that Disney does make a tender offer for it's shares but pays \$24 per share. What will happen to the value per share for the shareholders who do not sell back?

a. The share price will drop below the pre-annoucement price of \$22.26

b. The share price will be between \$22.26 and the estimated value (above) or \$23.52

c. The share price will be higher than \$23.52

This spreadsheet allows you to compute the optimal debt ratio firm value for any firm, using the same information used for Disney. It has updated interest coverage ratios and spreads built in.

20 To compute this change in value per share, we first compute how many shares we would buy back with the additional debt taken on of \$ 6,263 billion (Debt at 30% optimal - Current Debt) and the stock price of \$ 22.26. We then divide the increase in firm value of \$ 3,133 million by the remaining shares outstanding: Change in stock price = \$ 3012 million / (2475 - (6263/22.26)) = \$ 1.37 per share

 D/(D+E) 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% D/E 0.00% 11.11% 25.00% 42.86% 66.67% 100.00% 150.00% 233.33% 400.00% 900.00% \$ Debt \$0 \$6,977 \$13,954 \$20,931 \$27,908 \$34,885 \$41,862 \$48,838 \$55,815 \$62,792 Beta

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