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The present value of all its future pre-tax earnings is $10,000 (i.e. the pre-tax value of Tribes assets is $10,000). The company is all equity
The present value of all its future pre-tax earnings is $10,000 (i.e. the pre-tax value of Tribes assets is $10,000). The company is all equity financed and has a corporate tax rate of 40%. Suppose that the firm decides to repurchase some equity by issuing some (perpetual) debt. More precisely, the firm promises $2,500 out of the $10,000 in pre-tax earnings to bondholders. What is the the value D of the debt, the (after-tax) value E of the equity, and the (after-tax) value VL of the firm?
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