Consider an unlevered firm with ebit of 6 million and 1, Ask an Expert

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Consider an unlevered firm with EBIT of $6 million and 1 million shares of common equity outstanding. The required rate of return on the firm’s assets is 10%. The firm has a corporate tax rate of 40%. The firm is considering issuing $18 million in debt at 7% interest. If it does, all the proceeds from the debt issue will be used to repurchase equity. The present value of bankruptcy costs after the new debt issue would be $5 million. If the firm is able to repurchase the shares for $36 per share what will be the value of equity after the restructuring?

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Financial Management, Finance

Category:- Financial Management
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