Firm currently is an all equity firm with market value

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A firm currently is an all equity firm with a market value of $600,000,000. The firm is contemplating dramatically increasing its leverage by selling $150,000,000 in bonds and using the proceeds to repurchase equity. The bonds promise a 10% interest payment at the end of each year. The bonds are structured so that the firm will pay exactly $50,000,000 of the principal back at the end of the third year, sixth year, and ninth year, and thus the bonds will be fully retired at the end of the ninth year. The corporate tax rate is 30% and there are no personal taxes. What will the market value of the firm be the moment after this deal is announced? [Hint: calculate the present value of the annual tax savings from the interest on the debt over the nine year life of the loan. Remember to take into account the fact that the interest payments change over time.]

Reference no: EM131835358

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