M.G. Movers can borrow at 7.5 percent. The firm currently has no debt, and the cost of equity is 16 percent. The current value of the firm is $540,000. What will the value be if the firm borrows $160,000 and uses the proceeds to repurchase shares? The corporate tax rate is 34 percent.
Value of a levered firm = Value unlevered + PV of interest tax ...
The solution explains how to determine the value of firm if it borrows funds to repurchase shares