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6 Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm's debt - equity is
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm's debtequity is expected to rise from percent to
percent. The firm currently has $ million worth of debt outstanding. The cost of debt is percent. The firm expects to generate a cash flow of $ per year in
perpetuity and pays no taxes.
What is the market value of the firm in millions before the repurchase announcement? Hint: use the leverage and the debt outstanding.
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b What is the cost of capital for the company before the repurchase announcement? Hint: consider how the cash flows of the company relate to its value.
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c What is the expected return on the equity before the repurchase announcement?
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d What is the expected return on the firm's equity after the repurchase announcement?
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e What is the cost of capital for the company after the repurchase announcement?
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