#1 A firm currently has no debt The firm has 10 million...

This preview shows page 1 - 2 out of 2 pages.

Finance 414 - Problem Set #3 – Fall 2015 Due at the start of class on Monday, September 28 th Questions on assignment should be directed to the class TA, Yutian Li, either via email ( [email protected] ) or by attending his Sunday office hours Chapter 16 Problems #1. A firm currently has no debt. The firm has 10 million shares outstanding and those shares currently have a market price of $30 per share. The firm is contemplating selling $50 million in bonds and using the proceeds to repurchase shares of stock. If they undertake this action, the firm intends to keep this level of debt financing for the foreseeable future. Assume that the corporate tax rate is 40%. Given this data, if the firm announces that they will sell the bonds and repurchase equity what: (a) do you expect the stock price to be immediately after the announcement? (b) will be the firm’s total market value of equity immediately after the announcement? (c) do you expect the stock price to be after the bond issue/repurchase are completed? (d) will be the firm’s total market value of equity after the bond issue/repurchase are completed?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture