Question
An unlevered firm has 1000 shares outstanding and is worth $10,000. Its EBIT is $1,000. The firm decides to issue $5,000 of perpetual debt @
An unlevered firm has 1000 shares outstanding and is worth $10,000. Its
EBIT is $1,000. The firm decides to issue $5,000 of perpetual debt @ 4% interest
rate and repurchase shares. What will be the common stock required return after
the repurchase? (The firm faces a 40% tax rate and has zero costs of financial
distress.) (6.857% - Note R su = 6%, and V l = V u + TD = $12,000)
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Financial Markets Instruments And Institutions
Authors: Anthony M. Santomero, David Babbel
2nd Edition
0072358688, 9780072358681
