After the bond issue and repurchase are complete

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A firm currently has no debt. The firm has 10 million shares outstanding and those shares currently have a market price of $20 per share. The firm is contemplating selling $50 million in bonds and using the proceeds to repurchase shares of stock. The corporate income tax rate is 35%, the effective personal tax rate on equity income is 10%, and the personal income tax rate on interest income is 20%. Given this data, if the firm announces that they will sell the bonds and repurchase equity, what do you expect the stock price to be: (a) immediately after the announcement (b) after the bond issue and repurchase are complete?

Reference no: EM131054782

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