Question
Your firm is a 100% equity-financed firm with 100 million shares outstanding, each trading at a price of $10 per share. Your firm faces a
Your firm is a 100% equity-financed firm with 100 million shares outstanding, each trading at a price of $10 per share.
Your firm faces a corporate tax rate of 25%.
Your CEO studied Modigliani and Miller's capital structure theory ("with tax") and argues that the firm should refinance some of its equity into debt.
The plan is for the firm to issue $200 million worth of bonds and to use the money to purchase an equal dollar amount of the firm's stock.
a) What should be the new total firm value after the buyback?
b) What should be the new market value of the remaining equity after the buyback?
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