1. Firm B is currently an all-equity firm with 10 million shares. Its earnings before interest and taxes (EBIT) is $10 million and will stay the same forever. The firm's cost of equity is 10%.
2. What is firm B's stock price?
3. What is firm B value of equity (E)?
4. What is firm B's earnings per share?

Assume the firm issues $50 million permanent debt to repurchase its stock. Its debt cost of capital is 1%. Assume perfect capital market for problem c, d, e, and f

1. What is firm B's stock price after the transaction?
2. What is firm B's value of equity after the transaction?
3. What is firm B's equity cost of capital after this transaction?
4. What is firm B's earnings per share after this transaction?

Assume the firm still issues $50 million permanent debt to repurchase its stock. Its debt cost of capital is 1%. Assume a corporate tax rate of 40%, an interest income tax rate of 40%, and an equity income tax rate of 20% for problem h, i, j, k, l

1. What is firm B's effective tax advantage of debt?
2. What is firm B's stock price after the transaction?
3. What is firm B's value of equity after the transaction?
4. What is the firm B's equity cost of capital after this transaction?

Answer rating: 100% (QA)

1 Firm Bs stock price The stock price can be calculated using the Gordon Growth Model which is based on the assumption of constant growth in perpetuit... View the full answer