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Market value of equity after the additional borrowing

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Assume perfect capital markets with both corporate and personal taxes. The firm is not expected to grow (g=0) and the $60 mil of debt is expected to be permanent. The corporate tax rate is 34%, the bondholder tax rate is 28%, and the equityholder tax rate is 20%. Answer the following questions.

D = 60, E = 120

a. How much of the levered firm value is attributable to the tax shield on debt?

b. How much better off will Zytech's shareholders be if the firm borrows an additional $20 mil of debt and uses the borrowed money to repurchase stock?

c. What will be the market value of equity after the additional borrowing and repurchase?

d. Suppose that before the transaction described in part (b) the firm had 15,000,000 shares outstanding. If the firm uses the $20 mil debt issue proceeds to repurchase shares, what is the price per share after the transaction?

Reference no: EM132842587

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