Suppose that Firm A and Firm B are similar firms, except for different capital structures. Both...

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Suppose that Firm A and Firm B are similar firms, except for different capital structures. Both firms generate perpetual EBIT $10,000 per year. Firm A has no debt, and the return on firm A's equity is 10%. Firm B, currently has debt outstanding with a market value $40,000. The interest rate is 6%, which is also the risk-free rate. Both firm A and firm B have 5,000 common shares outstanding. Assume that the tax rate is 40%. Firm B's CFO wants to employ a more aggressive financial leverage policy. Now suppose that firm B's CFO just announced that, the firm will issue $20,000 more debt, and uses the $20,000 to repurchase shares. Question: How many shares will firm B repurchase? Suppose that Firm A and Firm B are similar firms, except for different capital structures. Both firms generate perpetual EBIT $10,000 per year. Firm A has no debt, and the return on firm A's equity is 10%. Firm B, currently has debt outstanding with a market value $40,000. The interest rate is 6%, which is also the risk-free rate. Both firm A and firm B have 5,000 common shares outstanding. Assume that the tax rate is 40%. Firm B's CFO wants to employ a more aggressive financial leverage policy. Now suppose that firm B's CFO just announced that, the firm will issue $20,000 more debt, and uses the $20,000 to repurchase shares. Question: How many shares will firm B repurchase?

Answer rating: 100% (QA)

We can use the weighted average cost of capital WACC to calculate the return required by the equity ... View the full answer