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You have been asked by JJ Corporation, a California- based firm that manufacturers and services digital satellite TV systems, to evaluate its capital structure. They currently have 70 million shares outstanding trading at $10 per share. In addition, the company has 500,000 bonds, with a coupon rate of 8%, trading at $1000 per bond. JJ is rated BBB and the interest rate on BBB straight bonds is currently 10%. The beta for the company is 1.2, and the current risk-free rate is 6%, the market risk premium is 5%. The tax rate is 40%.

JJ Corporation is proposing to borrow $250 million and use it for the following purposes:

Buy back $100 million worth of stock.

What will the value of the firm be after this additional borrowing? (assuming zero growth, and that the debt is perpetual)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92172381

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