Refi Corporation is planning to repurchase part of its common
stock by issuing corporate debt. As...
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Refi Corporation is planning to repurchase part of its commonstock by issuing corporate debt. As a result, the firm’sdebt-equity ratio is expected to rise from 40 percent to 50percent. The firm currently has $3.5 million worth of debtoutstanding. The cost of this debt is 7 percent per year. The firmexpects to have an EBIT of $1.34 million per year in perpetuity andpays no taxes.
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a.
What is the market value of the firm before and after therepurchase announcement? (Do not round intermediatecalculations and enter your answers in dollars, not millions ofdollars, rounded to the nearest whole number, e.g.,1,234,567.)
b.
What is the expected return on the firm’s equity before theannouncement of the stock repurchase plan? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
c.
What is the expected return on the equity of an otherwiseidentical all-equity firm? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)
d.
What is the expected return on the firm’s equity after theannouncement of the stock repurchase plan? (Do not roundintermediate calculations and enter your answer as a percentrounded to 2 decimal places, e.g., 32.16.)
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