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ABC has a share price of $5.50 and 10M shares outstanding. Suppose the firm announces plans to lower its tax bill by borrowing $20M and

ABC has a share price of $5.50 and 10M shares outstanding. Suppose the firm announces plans to lower its tax bill by borrowing $20M and repurchasing shares. The firm has a corporate tax rate of 30%. Shareholders expect the change in debt to be permanent.

If the only market imperfection is corp taxes, what will the share price be after the announcement?

Suppose the imperfections are corp taxes AND financial distress costs. If the share price rises to $5.75 after the announcement, what are the PV(financial distress costs)?

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