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Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars....

Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars. It has a total of 10 million shares. The firm announces it will borrow 20 million dollars permanently to repurchase its shares. The capital market is not perfect: The corporate tax rate is 30%, personal tax rate on interest income is 20%, and personal tax rate on equity income is 10%.

a. What is the firm’s stock price before announcing the stock repurchase?

b. What is the effective tax advantage of debt?

c. What is the firm’s value after announcing the stock repurchase?

d. What is the firm’s stock price after announcing the stock repurchase?

e. What is the market value of the firm’s equity after the stock repurchase?

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Expert Solution

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

jeff jeffy answered 1 year ago
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