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Jackne Cement is an all-equity firm with a market valuation of $100 million. Its tax rate...

Jackne Cement is an all-equity firm with a market valuation of $100 million. Its tax rate is 25%. The managers are contemplating a revision of its capital structure involving the issuance of $50 million in 30 year bonds. These bonds would be issued at par, with a maturity value of $1,000 and a 10% coupon rate, with interest paid annually. The proceeds from this debt issue would be used to buy back half of the firm’s stock. How would this action affect Jackne’s value?

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Answer #1

By issuing bonds worth $50 million and repaying half of equity will result into increase in the value of the firm to $112.5 million

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