The only market imperfection is taxation. ABC Co. plans to borrow some money on a permanent basis to finance a share buyback program. Upon the announcement of this plan, ABC's share price rose from $5 to $5.70. ABC has 1 million shares outstanding. The corporate tax rate is 10%. Assuming savings from interest tax shields can be discounted at the cost of debt, how much does ABC plan to borrow?

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Answer is It is not accurate to say that taxation is the only market imperfection as there are vario... View the full answer