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Company A is currently all - equity financed with 1 0 0 million shares. The EBIT will be 3 0 million in year 1 and
Company A is currently allequity financed with million shares. The EBIT will be million in year
and growing at per year forever. The company always has a corporate tax. The investors
discount cash flows from similar projects at per year.
Now, the company takes a million loan to make distributions to the shareholders. The interest rate
on the loan is There will be no principal repayments made until the loan is paid back in full in year
Due to financial distress, of Company As EBITs will be lost while it carries the million debt.
Capital gain tax is zero and dividend tax is
a If Company A announces that it will use the million to repurchase shares, what will be the price
right after the share repurchase? What is the price right after the announcement? pts
b If Company A announces that it will use the million to make a onetime dividend payout, what will
be the price right after the dividend payout? What is the price right after the announcement?
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