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What is the value of the tax shield

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Question - An all-equity firm is subject to a 30 per cent tax rate. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. The firm announces a program to issue $1 million worth of bonds at 10 per cent interest and to use the proceeds to buy back common stock. Assume that there is no change in costs of financial distress and that the debt is perpetual. What is the value of the tax shield that the firm acquires through the bond issue?

Reference no: EM133017693

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