Arizona Coffee, Inc. is an all-equity firm, and has just announced that it will raise $5 million perpetual debt to repurchase some of its shares (in about a month's time). Suppose the firm currently has 500,000 shares outstanding, and that its shares were trading at $20/share before the announcement. Further assume that the marginal corporate tax rate is 40% and that it is highly unlikely that Arizona Coffee will become financially distressed after raising $5 million in debt (i.e. PV of financial distress costs is approximately zero). 

How many shares will Arizona Coffee Inc., repurchase (in about a month's time)?

Answer rating: 100% (QA)

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