Krugman Technology is currently a zero-debt firm with a stock price of $7.50 
per share and 20 million shares. Although investors currently expect Krugman to 
remain a zero-debt firm, Krugman plans to announce that it will borrow $50 million 
and use the money to repurchase shares. Krugman will pay interest only on this debt, 
and it expects to maintain this level of debt forever. The corporate tax rate is 40%. 
a. What is the market value of Krugman's existing assets before the announcement? 
b. What is the market value of Krugman's assets just after the debt is issued, but before 
the shares are repurchased? 
c. What is Krugman's share price just before the share repurchase? How many shares 
will Krugman repurchase? 
d. What are Krugman's market value of equity and debt after the share repurchase?

Answer rating: 100% (QA)

a The market value of Krugmans existing assets before the announcement can be calculated using the m... View the full answer