Hey guys I’m stuck on this homework problem.
any help would be greatly appreciated!
A firm currently has no debt. The firm has 10 million shares outstanding and those
shares currently have a market price of $20 per share. The firm is contemplating selling
$50 million in bonds and using the proceeds to repurchase shares of stock. The corporate
income tax rate is 35%, the effective personal tax rate on equity income is 10%, and the
personal income tax rate on interest income is 20%. Given this data, if the firm
announces that they will sell the bonds and repurchase equity, what do you expect the
stock price to be:
(a) immediately after the announcement
(b) after the bond issue and repurchase are complete
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