Question
Vader Corp. is a firm that generates a perpetual EBIT of $50,000 per year. The firm currently has no debt and has 50,000 shares outstanding.
Vader Corp. is a firm that generates a perpetual EBIT of $50,000 per year. The firm currently has no debt and has 50,000 shares outstanding. The cost of capital is 10%. The firm is thinking of issuing $200,000 in debt and using the proceeds to repurchase equity. The firm could borrow the funds at 8%.
- If there are no corporate taxes and M&M Proposition I holds, what would be the market value of Vader Corp. if it issues the debt and repurchases the shares?
Answer is $500000 - need an in-depth solution.
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The Economics Of Money Banking And Finance
Authors: Howells, Keith Bain
3rd Edition
0273693395, 978-0273693390
