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The Dooley Co. is in the 34% tax bracket, and its current market value is $10 million. The company is financed entirely with equity. a.
The Dooley Co. is in the 34% tax bracket, and its current market value is $10 million. The company is financed entirely with equity.
a. What are Dooleys annual tax savings from interest deductions if it issues $2 million of five-year bonds at 12% interest rate and uses the proceedings to retire equity?
b. Given your answer to part a, above, and also given that the present value of Dooleys expected costs of financial distress due to this leverage would be $12,000, what will be the value of the firm be if it issues the debt?
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