What is the present value of bbb financial distress costs

Reference no: EM13303728

Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that BBB announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.

Suppose that BBB pays corporate taxes of 40% and shareholders expect the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BB's stock rises to $10.80 per share following the announcement, then what is the present value of BBB's financial distress costs?

Reference no: EM13303728

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