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Evaluate the firm capital structure

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You work for Microsoft. Your boss, Steve Ballmer, asks you to evaluate the firm's capital structure. Microsoft currently has a market value of $200 billion and no long-term debt outstanding. You forecast that the firm will earn $10 billion next year and will generate cashflows of $8 billion after all investments have been made. The forecasts are accurate to within +/- $1.2 billion. The firm's marginal tax rate is 40%.

(a) Microsoft is thinking about issuing $30 billion in public bonds. It will use the proceeds from the sale to repurchase equity. How will this transaction affect the riskiness of the firm's equity? Why?

Reference no: EM133002805

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