Need Finance Help STU s Disco Factory Inc. is financed solely by equity
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Need Finance Help STUs Disco Factory Inc. is financed solely by equity and it is considering issuing debt and using the proceeds to repurchase some of the outstanding shares at the current market price of 30. There are currently 200,000 shares outstanding. EBIT is expected to remain at 1.5 million, with all earnings paid out as dividends. The firm can issue debt at a rate of 8%, and the firms tax rate is 40%. Three alternative amounts of debt are being considered: Amount of debt 0 1,000,000 2,000,000 Required return on equity 15% 15.5% 16% Assume that all stock repurchases will be made at 30 per share. (15 marks) a. Using the M&M Proposition I with taxes, calculate the value of the firm at each debt level. b. What is the optimum amount of debt? c. Show that, at the optimum...