Maurice Tutor

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Teaching Since: May 2017
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  • MCS,PHD
    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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  • Professor
    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 15 Jan 2018 My Price 5.00

debt/equity ratio

A firm has a current debt/equity ratio of 2:3. It is worth $10 billion, of which $4 billion is debt. The firm’s overall cost of capital is 12%, and its debt currently pays an (expected) interest rate of 5%. The firm estimates that its debt rating would deteriorate if it were to refinance to a 1:1 debt/equity ratio through a debt-for-equity exchange, so it would have to pay an expected interest rate of 5.5%. The firm is solidly in a 35% corporate income tax bracket. The firm reported net income of $500 million. On a corporate income tax basis only, ignoring all other capital structure–related effects, what would you estimate the value consequences for this firm to be? When would equity holders reap this benefit? What would be the stock’s announcement price reaction?

Answers

Maurice Tutor
(5)
Status NEW Posted 15 Jan 2018 09:01 PM My Price 5.00

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