What is the market value and required return

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Reference no: EM13725134

An unlevered company operates in prefect markets and has a earnings before interest and taxes (EBIT) of $250,000. Assume that the required return on assets for firms in this industry is 12.5%. Suppose that the firm issues $1 million worth of debt with a required return of 5% and uses the proceeds to repurchase outstanding stock.

a. What is the market value and required return of this firm’s stock before the repurchase transaction?

b. What is the market value and required return of this firm’s remaining stock after the repurchase transaction?

Reference no: EM13725134

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