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Assume that capital markets are perfect. Firm DZ is an all-equity firm, has one million shares outstanding, and has earnings of $500,000 per year for ever. The investor's required rate of return is 10 percent. DZ now issues $2 million worth of 6 percent coupon bonds at par and uses the proceeds to repurchase equity. (i) What is the value of this firm and the share price? (ii) What will be the value of the firm after the repurchase and what will be the share price?

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Basic Finance, Finance

Category:- Basic Finance
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