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Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion. It also has $750 million in debt outstanding. Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt. Assume perfect capital markets.
Suppose you are a shareholder in Galt industries holding 100 shares and you disagree with this decision to delever the firm. You can undo the effect of this decision by:
1. Borrowing $100 and buying 40 shares of stock2. Selling 32 shares of stock and lending $8003. Selling 40 shares of stock and lending $10004. Borrowing $1500 and buying 60 shares of stock
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Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment.
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Baird Bros. Construction is considering the purchase of machine at a cost of $125,000. The machine is expected to generate cash flows of $20,000 per year for 10 years and can be sold at the end of ten years for $10,000.
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Write down the advantages of the organization existing as a single entity.
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