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An all equity firm (i.e., no debt) has a current market value of $600m. It has 10m shares outstanding. Suppose the firm decides to change its capital structure by borrowing #300m in debt from the bond market. The firm's tax rate is 40%. The firm plans to use the $300m to repurchase debt shares.

1. What is the expected increase in the share price of the firm? How many shares would the firm repurchase?

2. Suppose that instead of using the entire $300m to repurchase shares, the firm decides to repurchase $200m in shares and to retain $100m as cash on its balance sheet. In this case, what is the firm's equity value and what is its total value (Debt + Equity) after the repurchase is over?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92354123

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