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A firm currently is an all equity firm with a market value of $200,000,000. The firm is contemplating dramatically increasing its leverage by selling $150,000,000 in bonds and using the proceeds to repurchase equity. The bonds promise a 10% interest payment at the end of each year. The bonds are structured so that the firm will pay exactly $50,000,000 of the principal back at the end of the third year, sixth year, and ninth year, and thus the bonds will be fully retired at the end of the ninth year. The corporate tax rate is 35% and there are no personal taxes. What will the market value of the firm be the moment after this deal is announced?

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Financial Management, Finance

Category:- Financial Management
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