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An all-equity firm is subject to a 30 percent tax rate. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. The firm announces a program to issue $1 million worth of bonds, at 10 percent interest, and to use the proceeds to buy back common stock. Assume that there is no change in costs of financial distress and that the debt is perpetual.
a. What is the value of the tax shield that the firm acquires through the bond issue?
b. According to Modigliani & Miller, what is the likely increase in the firm's market value per share, after the announcement, assuming efficient markets?
c. How many shares will the company be able to repurchase?
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After taking a sample and computing, a statistician says,
"Discuss conditions under which managers are likely to have incentives to report lower earnings i.e. engaging in earnings management. You may compare and contrast these conditions under which managers likely ave incentives to report higher earnings."
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 13 percent for one year. During this time period the dollar falls 12 percent against the euro. What is the effective interest rate on the loan for one year?
A stock has an expected return of 14.6 percent, the risk-free rate is 5.70 percent, and the market risk premium is 7.3 percent. Required: What must the beta of this stock be?
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