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You are the CEO of a firm that has no debt - all capital comes from...

You are the CEO of a firm that has no debt - all capital comes from common equity. Currently, the market value of your firm (its market capitalization) is $100m. Assume that the corporate tax rate is 21%. If you were to issue $50m of debt and buy back shares, what is your estimate of how much firm value will change. Assume that corporate tax rates are the only market imperfection and that your firm will consistently have the profitability to pay interest on the debt.

Firm value will likely increase by approximately $10.5m

Firm value will not change.

Firm value will increase by approximately $50m

Firm value will increase by approximately $21 million.

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Answer #1

ACCORDING TO MM APPROACH WITH TAXES :

If all equity firm, that is, unlevered firm, plans to issue debt to repurchase stock,

The market value of firm increases by = Amount of debt x tax rate = 50 x 21% = 10.5 million

Answer :  Firm value will likely increase by approximately $10.5m (Thumbs up please)

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