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johnpaech johnpaech
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Posts: 1098
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6 years ago
Suppose that BBB pays corporate taxes of 35% and that shareholders expects the change in debt to be permanent.  Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs.  If the price of BBB's stock rises to $10.85 per share following the announcement, then the present value of BBB's financial distress costs is closest to:
A) $21.25 million
B) $35.00 million
C) $11.40 million
D) $13.75 million
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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wrote...
#1
6 years ago
D
Explanation:  D) VU = $10.00 × 25 million shares = $250 million
VL = VU + τcB = $250 + .35($100) = $285 million/25 million shares = $11.40
PV of financial distress costs = ($11.40 - $10.85) × 25 million shares = $13.75 million
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