Zego corp is an all-equity firm and the shareholderrsquos, Ask an Expert

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Zego Corp. is an all-equity firm and the shareholder’s required rate of return is 10 percent. Its EBIT is $1,000,000 per year forever and the firm faces a corporate tax rate of 30 percent. Zego now decides to issue $4,000,000 of risk-free debt with an interest rate of 5 percent and use the proceeds to buy back outstanding shares. (i) What is the market value of Zego’s equity before the capital structure change? (ii) What is the value of the tax shields generated by the new debt issue? (iii) What is the total firm value of Zego after the capital structure change?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92719853

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