Question

Use the information for the question(s) below. Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares. gestion Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBB's stock rises to $10.85 per share following the announcement, then the present value of BBB's financial distress costs is closest to: Select one: A. $13.75 million B. $21.25 million C. $35.00 million

Answer 1

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@v a 1x 9 ENG 04:06 18-03-2020 CX52 - = x CW fx CX CV CY CZ DA DB DC DD DE DF DG DH A 35 36 37 38 39 VALUE OF ALL EQUITY FINANCED FIRM = VU = 250 MILLION VALUE OF LEVERED FIRM = VL =VALUE OF UNLEVERED FIRM + DEBT*(TAX RATE) 285 [250 + 100*35%] [VU + DEBT*t] 43 44 DUE TO EXPECTED BANKRUPTCY COSTS VALUE OF FIRM = 25 X 10.85 = 271.25 18 ANS: A DECREASE IN VALUE DUE TO BANKRUPTCY COSTS 13.75 [285 - 271.25] 51 52 53 54 55 56 57 58 ... ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote LEVERAGED BUY SWAP Sheet2 distress BRIGHAN El ... + 7