King corporation is an unlevered firm with a market worth of $20 million. Given the tax benefit
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Question:
King corporation is an unlevered firm with a market worth of $20 million. Given the tax benefit of debt, the company is considering changing its existing capital structure by adding debt. For this purpose, it plans to issue a permanent debt of $ 2 million and use the proceeds to buy back the shares. The debt would be issued at an interest rate of 7 percent. The corporate tax rate is 40%.
Required:
- A. What is the effect of the new capital structure on the value of the firm? and
- B. What is the effect of the new capital structure on the remaining value of equity?
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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