Hi, I was just hoping for help with 2 assignment questions.

Assume that Abby was impressed by your discussion in Question 3 (initial values). He now understands that interest is tax deductable and the firm could potentially benefit from issuing more debt. Abby decides to issue $12 billion of debt (on permanent basis) and use the proceeds to repurchase shares. The corporate tax rate is 36.397%.

1. At the announcement of the repurchase, what is the new market value of the equity and the share price (assume no arbitraging)?
2. After the repurchase, how many shares are outstanding? How has this deal affected the total value of the firm?

What I was wondering about:

• At the time of the announcement does the value of debt remain the same and is only increased by the extra debt amount after actually acquiring it (i.e repurchase stage)?
• At the announcement stage, how does the market value of equity change, is it influenced by the interest tax shield?
• After the repurchase, how does the market value of equity change?

Initial At announcement After repurchase Value of debt 000s 22,356,100.00 22,356,100.00 34,356,100.00 Mkt value of Equity 000s 144,956,834.70 Total value in 000s 147,312,934.70 Share parice 114.33 Num Shares Outstanding in 000s 1267881