An all-equity firm is expected to have earnings per share in perpetuity of $6.00.The current price is $40.00 per share, which implies the equity capitalization rate (r_E) is 15percent.Suppose the firm issues debt and uses the proceeds to buy back stock so that expected earnings per share increase to $7.00 in perpetuity.Assuming a world where Modigliani-Miller Proposition I holds, what is

(a) thenew share price

(b) thenew equity capitalization rate(r_E)?

Answer rating: 100% (QA)

According to ModiglianiMiller Proposition I in a world with no taxes or financial distr... View the full answer