Question
Firm B is currently an all-equity firm with 10 million shares. Its earnings before interest and taxes (EBIT) is $10 million and will stay the
Firm B is currently an all-equity firm with 10 million shares. Its earnings before interest and taxes (EBIT) is $10 million and will stay the same forever. The firms cost of equity is 10%. Assume the firm still issues $50 million permanent debt to repurchase its stock. Its debt cost of capital is 1%. Assume a corporate tax rate of 40%, an interest income tax rate of 40%, and an equity income tax rate of 20% for problem h, i, j, k, l What is firm Bs effective tax advantage of debt? What is firm Bs stock price after the transaction? What is firm Bs value of equity after the transaction? What is the firm Bs equity cost of capital after this transaction?
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