Question
Zenith Corp. is an all-equity firm and has a perpetual EBIT of $250,000. The cost of unlevered equity is 12% and the corporate tax rate
Zenith Corp. is an all-equity firm and has a perpetual EBIT of $250,000. The cost of unlevered equity is 12% and the corporate tax rate is 40%. Zenith is considering issuing debt worth $175,000 to buy back equity. The personal tax rate on interest income is 50% and on dividends is 30%. What is the increase in firm value after issuing new debt?
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International Finance Theory and Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
10th edition
978-0133425895, 133425894, 978-0133423631, 133423638, 978-0133423648
