Gioanni Inc., has GH¢1 million in earnings before interest and taxes. Currently it is all-equity-financed. It may issue GH¢3 million in perpetual debt at 15 percent interest in order to repurchase stock, thereby recapitalizing the corporation. There are no personal taxes. If the corporate tax rate is 40 percent, what is the income available to all security holders if the company remains all-equity-financed? If it is recapitalized? What is the present value of the debt tax-shield benefits? The equity capitalization rate for the company’s common stock is 20 percent while it remains all-equity-financed. What is the value of the firm if it remains all-equity financed? What is the firm’s value if it is recapitalized?

Gioanni Inc., has GH¢1 million in earnings before interest and taxes. Currently it is all-equity-financed. It may issue GH¢3 million in perpetual debt at 15 percent interest in order to repurchase stock, thereby recapitalizing the corporation. There are no personal taxes. If the corporate tax rate is 40 percent, what is the income available to all security holders if the company remains all-equity-financed? If it is recapitalized? What is the present value of the debt tax-shield benefits? The equity capitalization rate for the company’s common stock is 20 percent while it remains all-equity-financed. What is the value of the firm if it remains all-equity financed? What is the firm’s value if it is recapitalized?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P

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