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1. XYZ Corporation is an all-equity financed firm...

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1. XYZ Corporation is an all-equity financed firm with 5 million shares outstanding. The firm has perpetual EBIT of $10 million. Its current cost of equity with this all-equity capital structure is 10%. The firm plans to issue a perpetual bond with $1,000 face value, 8% annual coupon, and 8% yield to maturity. A total of 10,000 units of such bond will be issued. (Note: A perpetual bond is a bond with indefinite maturity (N = ?). Use perpetuity concept to evaluate a perpetual bond.) Funds raised from the bonds will be used to repurchase outstanding shares. The effective tax rate is 25% at the corporate level. According to the MM theory, what is the initial change in equity value upon the announcement of the debt for equity exchange?,Refer to Question 1. Suppose there is a sudden change in the capital market. All else equal, what would be the initial change in equity value if the YTM of the bond jumps to 8.25%? Calculate it.,Enter your follow up question here...

 

Paper#10158 | Written in 18-Jul-2015

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