Consider a world with no taxes and perfect capital markets. The WW Corporation is currently all...

Consider a world with no taxes and perfect capital markets. The WW Corporation is currently all equity financed. Its earnings are $10M per year and will stay that way in perpetuity. The value of the firm is $120M. The firm is considering issuing risk-free debt worth $50M and maturing in 10 years at an interest rate of 6% and using it to repurchase $50M of equity. Ivan owns $1.5M of the stock of WW before the refinancing. By how much would his total lending or borrowing change when the firm refinances assuming he wants the same returns both before and after?

a. 1.5M b. 0.375M c. 0.875M d. 0.625M

Expert Solution

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

ANSWER : d : 0.625M

I HAVE ALSO SHOWN THAT HE GOT SAME CASH FLOW BY SELLING 0.625 M SHARES

jeff jeffy answered 1 year ago

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