AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 30 million shares of stock outstanding, currently worth $25 per share. BBB Corporation uses leverage in its capital structure. The market value of BBBs debt is $250mil., and its cost of debt is 3.5 percent. Each firm is expected to have earnings before interest and tax of $175mil. in perpetuity. Assume that every investor can borrow at 3.5 percent per year. Corporate tax rate is 35% and personal tax rate on bond interest income is 40%. Q24. If the personal tax rate on bond interest income decreases to 35% (from 40%), what is the new value of BBB corporations?

$750 mil.

$662.5 mil.

$875 mil.

$892.86 mil.

$900 mil.