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An all-equity firm is subject to a 30 percent tax rate. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. The firm announces a program to issue $1 million worth of bonds, at 10 percent interest, and to use the proceeds to buy back common stock. Assume that there is no change in costs of financial distress and that the debt is perpetual.
a. What is the value of the tax shield that the firm acquires through the bond issue?
b. According to Modigliani & Miller, what is the likely increase in the firm's market value per share, after the announcement, assuming efficient markets?
c. How many shares will the company be able to repurchase?
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On Becca’s 1st birthday, a savings account was opened for her containing $10,000. By her 5th birthday, the account had grown to $13,500 and $1000 was added. By her 13th birthday the account had grown to $17,000 and $2000 was added. Use the time-weigh..
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BetterPie Industries has 3 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 10,000 bonds. Assume the common shares are selling for $48 per share, the preferred shares are selling for $25.50 per share, a..
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