Question
XYZ Inc. is an unlevered firm with a market value of $9,000,000,000. The firm has a constant stream of cash flow in perpetuity, which it
XYZ Inc. is an unlevered firm with a market value of $9,000,000,000. The firm has a constant stream of cash flow in perpetuity, which it pays out as dividends every year. Imagine that the managers of XYZ Inc. want to add leverage to the firm. Specifically, suppose that the managers announce a previously unanticipated plan that the firm will issue perpetual debt later today and use the proceeds to repurchase some of the equity so that, after the recapitalization is executed, the firms debt to value ratio will be 30%. The firm will maintain this debt-to-value ratio in perpetuity. The corporate tax rate is 20%. Calculate the amount of perpetual debt that the firm should issue today under this recapitalization plan.
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