Question

27. Now that your firm has matured, you are considering adding
debt to your capital structure for the first time. Your all-equity
firm has a market value of $21 million and you are considering
issuing $2.1 million in debt with an interest rate of 9% and
using it to repurchase shares. You pay a corporate tax rate of
25%. Assume taxes are the only imperfection and the debt is
expected to be permanent.

a. What will be the total value of the firm after the change in the
capital structure?

b. What will be the value of the remaining equity after the change
in the capital structure?

Answer #1

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**ANSWER IS SHOWN IN MILLIONS
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DECIMALS**

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