Assume a capital market that satisfies the MM assumptions. In this market a firm engages in a leveraged recapitalization, le buying back some of its equlty using newly issund debt. How is this going to affect the value of the firm? This will not affect the value of the firm because the tax benefit of debt will be exactly offset by the increase in bankruptcy costs. This will not affect the value of the firm because the cash flows available to all investors do not change, what changes is simply how these cash flows are shared between different types of investors. This will increase the value of the firm because of the tax benefits of debt finding to the fact that interest expenses lower taxable income and thus increase cash flows Available to investors This will reduce the value of the firm because equity is mechanically becoming more risky, increasing the WACC of the firm, and other things equat a higher WACC means higher discounting of future cash flows, thus a lower firm value