Question
AAA is a clothing retailer with a current share price of $12.50 and with 25 million shares outstanding. Suppose that AAA announces plans to lower
AAA is a clothing retailer with a current share price of $12.50 and with 25 million shares outstanding. Suppose that AAA announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares. A. Assuming perfect capital markets, the share price for AAA after this announcement is closest to: B. Suppose that AAA pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assuming that capital markets are perfect except for the existence of corporate taxes, the share price for AAA after this announcement is closest to:\ C. Suppose that AAA pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of AAA's stock rises to $11.85 per share following the announcement, then the present value of AAA's financial distress costs is closest to:
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