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How will the stock market react to the transaction

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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%.

Problem (a) If Microsoft is similar to other firms that have a leverage recapitalization, how will the stock market react to this transaction? Why does the market react this way?

Reference no: EM132958305

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