Using proceeds to buy back shares of stock

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Reference no: EM131884288

Assume that your firm is currently unlevered and your CFO is considering issuing $500m of 6 percent coupon debt and using the proceeds to buy back shares of stock. Thus, there will be no net increase in total assets. This will move your firm from 0 percent leverage to approximately 30 percent leverage and your firm intends on staying at this higher leverage level for a very long time. Assume that the corporate tax rate is 40%. If corporate taxes is the only relaxation in the assumptions of the Modigliani and Miller Irrelevance Hypothesis, by how much should your firm's value increase, i.e. what is the PV of Interest Tax Shields that your firm will create?

Reference no: EM131884288

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