Probleman all-equity firm is subject to a 30 tax rate its, Ask an Expert

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Problem:

An all-equity firm is subject to a 30% tax rate. Its total market value is initially $3,500,000, and there and 175,000 shares outstanding. The firm announces a program to issue $1 million worth of bonds at 10% interest and to use the proceeds to buy back common stock.

Required:

Question 1: What is the value of the tax shield that the firm acquires through the bond issue?

Question 2: According to M&M, what is the likely increase in market value per share of the firm after the announcement (assuming efficient markets)?

Question 3: How many shares will the company be able to repurchase?

Explain in detail and show all workings.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91147426

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