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What will be the new value of the firm

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Question - The Rivoli Company has no debt outstanding, and its financial position is given by the following data: $2,930,832

Assets (Market value = Book value)$3,000,000 EBIT$500,000 Cost of equity, rs10%Stock price, P0$15 Shares outstanding, n0200,000The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 63% debt based on market values, its cost of equity, rs, will increase to 20% to reflect the increased risk. Bonds can be sold at a cost, rd, of 10%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. Its marginal tax rate is 20.00%. What effect would this use of leverage have on the value of the firm? That is, what will be the new value of the firm?

a. $3,665,689

b. $3,923,877

c. $3,215,434

d. $3,278,689

Reference no: EM132793621

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