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Section 2: Capital Structure An unlevered company operates in perfect markets and has earnings before interest...

Section 2: Capital Structure

  1. An unlevered company operates in perfect markets and has earnings before interest and taxes (EBIT) of $3m. Assume that the required return on assets for firms in this industry is 10%. The firm issues $15m worth of debt with a required return of 6% and uses the proceeds to repurchase outstanding stock. There are no corporate or personal taxes.
    a) What is the market value of the firm and required return of this firm’s stock before the repurchase transaction, according to M & M Proposition I?
    b) What is the market value of the firm and the required return and the required return on the firms remaining stock after the repurchase transaction, according to M & M Proposition II?

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jeff jeffy answered 6 months ago
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