Question 11 (7 points) An all-equity firm is subject to a 30% corporate tax rate. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. It announces that it will issue $1 million of bonds at 10% interest and uses the proceeds to buy back common stock (Assume no change in costs of financial distress). Part A: What will happen to the market value of equity at the announcement of the share repurchase? Increases to $3,800,000 Increase to $4,500,000 Stays the same Decreases to $2,500,000

An all-equity firm is subject to a 30% corporate tax rate. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. It announces that it will issue $1 million of bonds at 10% interest and uses the proceeds to buy back common stock (Assume no change in costs of financial distress). Part A: What will happen to the market value of equity at the announcement of the share repurchase? Increases to $3,800,000 Increase to $4,500,000 Stays the same Decreases to $2,500,000