Final answer:
With the assumption of perfect capital markets and a corporate tax rate of 30%, the new share price for Hawar International after borrowing $20 million and repurchasing shares would be approximately $9.59, factoring in the tax shield of the newly acquired debt.
Step-by-step explanation:
If Hawar International plans to lower its corporate taxes by borrowing $20 million and repurchasing shares, we have to consider the effect this will have on the stock price. To estimate the share price after this announcement, assuming perfect capital markets, we can use the Modigliani-Miller theorem on capital structure irrelevance.
This theorem indicates that the value of a levered firm is equal to the value of an unlevered firm plus the present value of the tax shield on debt. In this case, the tax shield would be the corporate tax rate times the amount borrowed ($20 million).
If we have a corporate tax rate of 30%, the tax shield is worth 30% of $20 million, which is $6 million. Consequently, the firm's value would increase by this amount. Before the repurchase, the firm's value is $5.50 per share times 10 million shares, amounting to $55 million. After the announcement, the new firm value is $55 million plus the $6 million tax shield, totaling $61 million.
However, since the company repurchases shares, the total number of outstanding shares will decrease. It will spend $20 million to buy back shares at the current price of $5.50, repurchasing approximately 3.636 million shares ($20 million / $5.50).
After the repurchase, there will be about 6.364 million shares left (10 million - 3.636 million). The new share price can be calculated by dividing the new total firm value by the remaining shares: $61 million / 6.364 million shares, which gives us a new share price of approximately $9.59.