Pharoah Security Company produces a cash flow of $240 per year and is expected to continue...

Pharoah Security Company produces a cash flow of $240 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Pharoah is 20 percent, and the firm is financed entirely with equity. Management would like to repurchase $200 in shares by borrowing $200 at a 8 percent annual rate (assume that the debt will also be outstanding into the infinite future). Using Modigliani and Miller’s Proposition 1 answer the following questions.

What is the value of the firm today?

Value of the firm

$enter the dollar value of the firm

What is the value of equity after the repurchase?

Value of the equity

$enter the dollar value of the equity

What will be the rate of return on common stock required by investors after the stock repurchase? (Round answer to 2 decimal places, e.g. 17.54%.)

Rate of return on common stock

enter the rate of return on common stock in percentages rounded to 2 decimal places %

Expert Solution

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