Question
Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average tax rate is 34%. The company wants to borrow
Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average tax rate is 34%.
The company wants to borrow $245 million to repurchase shares. The debt will have an interest rate of 5.2% and will be kept constant forever.
Part 1: What is the annual interest tax shield (in $ million)?
Part 2: What is the present value of all future annual interest tax shields (in $ million)?
Part 3: What is the new value of the firm (in $ million)?
Part 4: What is the new market value of equity (in $ million)?
Part 5: What will be the debt/equity ratio after the restructuring?
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