Question
Assume that a firm currently has a debt-to-equity ratio of 0, a Net Income of 0.6 million $ and a return on equity of 6.0%.
Assume that a firm currently has a debt-to-equity ratio of 0, a Net Income of 0.6 million $ and a return on equity of 6.0%. The firm plans to take on a new loan worth 1.5 million $ in market value. The firm is expected to keep the capital structure and the loan forever through refinancing. The bank charges 3.6% APR interest in semi-annual payments. Assume the tax rate is 21%. What is the firm's new share price after the firm announces the change in capital structure if the firm has 1.1 million shares outstanding? Note: If you cannot find the old Market Value of Equity assume it was 11 million $.
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