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A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share....

A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $3 million per year. The corporate tax rate is 40%. The firm is contemplating issuing a $9 million face value perpetual bond carrying 5% coupon interest per year and using the proceeds to retire some of its stock outstanding. Ignoring personal taxes. Suppose investors are subject to 20% personal tax rate on dividend income and personal 40% tax rate on interest income. Based on this information:

a. What will be the market value of the firm’s equity after the change in its capital structure?

b. What will be the share price after the change in firm’s capital structure?

c. What will be the firm’s WACC after the change in its capital structure?

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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