Solution 15-9 - Problem 16-9ius (Capital; Structure...

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Problem 16-9ius (Capital; Structure analysis ) The Rivoli Company has no debt outstanding and its financial position is given by the following data: Assets (book = market) $3,000,000 EBIT 500,000 Cost of equity rs 10% Stock price P0 $15 Shares outstanding, n0 200,000 Tax rate, T(federal-plus-state) 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost , rd, of 7%. Rivoli is a no-growth firm. Hence, all its earnings ate paid out as dividends, and earnings are expectationally constant over time. a- What effect would this use of leverage have on the value of the firm?
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Solution 15-9 - Problem 16-9ius (Capital; Structure...

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