Market value of firm prior to recap-irrelevance proposition, Financial Accounting

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Market value of firm prior to recap-irrelevance proposition

Question1. An all-equity business has 100 million shares outstanding selling for $20 a share. Management thinks that interest rates are unreasonably low and decides to perform a dividend recapitalization (a recap). It will raise $1 billion in debt and repurchase 50 million shares.

a. What is market value of firm prior to the recap? What is market value of equity?

b. Supposing the Irrelevance Proposition holds, what is market value of firm after the recap? What is the market value of equity?

c. Do equity shareholders appear to have gained or lost as a result of recap? Please describe.

d. Suppose now that the recap raises total firm cash flows, which adds $100 million to the value of the firm. Now what is the market value of the firm? What is market value of equity?

e. Do equity shareholders appear to have gained or lost as a result of the recap in this revised scenario?

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Financial Accounting: Market value of firm prior to recap-irrelevance proposition

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Financial Accounting: Market value of firm prior to recap-irrelevance proposition

Reference No:- TGS03781

Have a Question? (oR Write a Review)

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Request for Solution File

Ask an Expert for Answer!!

Financial Accounting: Market value of firm prior to recap-irrelevance proposition

Reference No:- TGS03781

Recent Questions Asked Financial Accounting

Q : Rationale and outcomes of a specific development project

Q : Accounting break-even level of sales

Q : Employment contracts and the legal liabilities of managers

Q : Annualized holding period return

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Q : Nominal rate of return on perpetual preferred stock

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Q : Depreciation expenditure-estimation of fixed costs

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