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2. The firms current share price is $38 with 10 million shares outstanding. Suppose the firm announces plans to increase its leverage by borrowing $100
2. The firms current share price is $38 with 10 million shares outstanding. Suppose the firm announces plans to increase its leverage by borrowing $100 million and repurchasing shares. Suppose the only market imperfections are corporate taxes with 21% tax rate and financial distress costs. If the share price rises to $40 after this announcement, what is the PV of financial distress costs the firm will incur as the result of this new debt? A) $41 million B) $20 million C) $19 million D) $2 million E) $1 million
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