You work for Microsoft. Your boss, Steve Ballmer, asks you to evaluate the firm's capital structure. Microsoft currently has a market value of $200 billion and no long-term debt outstanding. You forecast that the firm will earn $10 billion next year and will generate cashflows of $8 billion after all investments have been made. The forecasts are accurate to within +/- $1.2 billion. The firm's marginal tax rate is 40%.

(a)Microsoft is thinking about issuing $30 billion in public bonds. It will use the proceeds from the sale to repurchase equity. How will this transaction affect the riskiness of the firm's equity? Why?

Answer rating: 100% (QA)

To evaluate the impact of issuing 30 billion in public bonds and using the proceeds to repurchase equity on the riskiness of Microsofts equity we need ... View the full answer