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Assume the M&M assumptions with taxes hold. The tax rate is equal to 20%. A firm changes its capital structure: it issues an additional amount
Assume the M&M assumptions with taxes hold. The tax rate is equal to 20%. A firm changes its capital structure: it issues an additional amount of $25 in perpetual debt and uses the inflow to buy back stock. Initially, i.e., before the buyback, the firm has 5 shares outstanding. If all increases or decreases in firm value are spread evenly across shareholders, what is the change in the firm's stock price "P(1)-P(0)" and in its equity value "E(1)-E(0)"?
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