Bonzai Tree Company has 15M shares in an all-equity firm, at a price of $13 per share.

The firm announced that they will borrow $100M to buy back shares (using the full amount of debt). They will keep this debt permanently. Upon announcement the share price increases to $16 per share. The corporate tax rate is 25%, taxes and financial distress costs are the only relevant market imperfections. 

What is the present value of the financial distress costs - PV (FDC)?

Answer rating: 100% (QA)

Step 1 The Advantage on the borrowed amount is as follows The overall advantage of ... View the full answer