A firm currently has $100,000$ shares of common stock outstanding, with a price of $$20.$ The EBIT for the firm will be $$500,000.$ The marginal tax rate for the firm is $40\%.$ All earnings are paid out in the form of dividends. Therefore, there is no growth for the firm and the stock price is determined by DPS$/$ks$.$ The firm must borrow in increments of $$250,000,$ with a maximum debt level of $$1,000,000.$ The increases to the cost of debt and the cost of equity increases with debt is as follows:Repurchasing Shares to Change Capital Structure

This is an example of a firm with $100\%$ equity, $A=E.$ Firm currently has $100,000$ shares of

common stock outstanding, with a price of $$20.$ The EBIT for the firm will be $$500,000.$ The

marginal tax rate for the firm is $40\%.$ All earnings are paid out in the form of dividends.

Therefore, there is no growth for the firm and the stock price is determined by DPS $\frac{?}{k_s}.$

The firm must borrow in increments of $$250,000,$ with a maximum debt level of $$1,000,000.$

The increases to the cost of debt and the cost of equity increases with debt is as follows:

Sell bonds and repurchase common stock with proceeds.

How many shares can we repurchase with issuing $$250,000$ of debt?

$$250,\frac{000}{\text{\$}}20=$

$12,500$

With debt EBIT will now be reduced by interest expense and taxes will also be reduced.