Reference no: EM132006639

1. A firm currently has no debt and its equity has a market value of $100 million. The firm is contemplating selling $10 million in bonds and using the proceeds to repurchase shares of stock. The corporate income tax rate is 34%, the effective personal tax rate on equity income is 10%, and the personal income tax rate on interest income is 34%. Given these tax parameters, what should be the total value of the firm after the repurchase is complete?

(a) $90 million

(b) $99 million

(c) $100 million

(d) $101 million

(e) $110 million

2. Initially a firm is unlevered and has an equity market value of $200 million. The firm issues $100 million in debt and repurchases $100 million of stock. After these transactions the market value of the firm's equity is $120 million and the market value of debt is $100 million. The corporate tax rate is .40 and there are no personal taxes or financial distress costs. Based on this data, the market's estimate of the present value of financial distress costs under the new capital structure must be

(a) $0

(b) $10,000

(c) $20,000

(d) $30,000

(e) $40,000

(f) $60,000

(g) $100,000