There are taxes and financial distress costs in the market. ABC Co. wants peform a recapitilization exercise by issuing some amount of debt. This amount of debt will be held permanantly. ABC will use the borrowed funds to buy back some shares. Currently, there are 50 million shares outstanding, trading at $10 per share. Tax shields may be discounted at Rd. Upon the announcement, the share price of ABC immediately rises to $11. Analysts estimate that the PV of financial distress costs associated with this debt issue are $5 million. Corporate tax rate is 21%. What is debt?

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Introduction In corporate finance recapitalization refers to the restructuring of a companys capital structure often involving the issuance of debt to ... View the full answer