(a). Suppose that if IST issues equity, the share price will remain $13.50, To maximize the long-term share price of the firm once its true value is known, would managers choose to issue equity or borrow the $500 million if
i. they know the correct value of the shares is $12.50?
ii. they know the correct value of the shares is $14.50?
b. Given your answer to part (a), what should investors conclude if IST issues debt? What will happen to the share price?
c.Given your answer to part (a), what should investors conclude if IST issues debt? What will happen to the share price?
d. How would your answers change if there were no distress costs, but only tax benefits of leverage.
This question was asked on Mar 22, 2010 and answered on Mar 22, 2010.
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