How much would the share price increases

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Question - Cavo Corporation expects a net income of $200,000 every year forever and all of the net income will be paid to shareholders as dividends. The company currently has 50,000 common shares outstanding and zero debt. Its corporate tax rate is 35% and its cost of equity is 10%. How much would the share price increases if the company decides to issue $1,000,000 bonds? Show your work!

a. It will increase by $6.

b. It will increase by $7.

c. It will increase by $8.

d. It will increase by $350,000.

e. None of the above choices.

Reference no: EM132960950

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