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An all-equity companys total market value is $6 million and it has 200,000 shares outstanding. The company announces a program to issue $2 million worth
An all-equity companys total market value is $6 million and it has 200,000 shares outstanding. The company announces a program to issue $2 million worth of bonds at 8% interest and to use the proceeds to buy back its ordinary shares. Assume perfect capital markets and a corporate tax rate of 30%.
In perfect capital markets, what is the likely increase in companys share price after the announcement? Show all calculations.
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