1. Arizona Coffee, Inc. is an all-equity firm, and has just announced that it will raise $5 million perpetual debt to repurchase some of its shares (in about a months time). Suppose the firm currently has 500,000 shares outstanding, and that its shares were trading at $20/share before the announcement. Further assume that the marginal corporate tax rate is 40% and that it is highly unlikely that Arizona Coffee will become financially distressed after raising $5 million in debt (i.e. PV of financial distress costs is approximately zero). How many shares will Arizona Coffee Inc., repurchase (in about a months time)?

1. 208,334 shares
2. 217,392 shares
3. 234,890 shares
4. 238,981 shares
5. 276,981 shares