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bounce houz inc. is all equity financed with a $22 share price and with 30 million...

bounce houz inc. is all equity financed with a $22 share price and with 30 million shares outstanding. The company wants to buy back shares by issuing 300 million in debt. Shares will be repurchased at a fair price. Assume the debt willl be permanent debt and that the appropriate cost of debt will be 4% and the current corporate tax rate the firm pays is 30%

A. 660

B.90

C.600

D. 0.5

E.0.333

F. 0.666

G.12

H.18

I.300

j. 1

k. 25

L . 750

what will be the new total firm value when the recap is annouced (in millions)

Expert Solution

Value of the Unlevered (all equity) firm = $22 per share * 30 million = $660 million

From Modigliani Miller ,

Value of Levered firm = value of unlevered firm + tax rate * Debt

= $660 million + 0.3*$300 million

=$750 million

new total firm value when the recap is annouced (in millions) = $750 million (option L)

jeff jeffy answered 2 years ago

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