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The Rivoli Company has no debt outstanding and its financial position is given by the following data:
Market value of Assets $3,000,000
EBIT $ 500,000
Stock price $15
Shares outstanding 200,000
Tax rate 40%
The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, the bonds can be sold at a cost, rd, of 7%. Rivoli is a no-growth firm and all of its earnings are paid out as dividends.
f. What is the new total corporate value of Rivoli?
g. What is the new stock price?
h. How many shares remain outstanding after the recapitalization?
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