Use the Information for the Question(s)below

question 85

Multiple Choice

Use the information for the question(s) below.
Big Blue Banana (BBB) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding.Suppose that Big Blue Banana announces plans to lower its corporate taxes by borrowing $100 million and using the proceeds to repurchase shares.
-Suppose that BBB pays corporate taxes of 21% and that shareholders expect 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 $10.29 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.

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Definitions:

Sigmund Freud

An Austrian neurologist best known for founding psychoanalysis, a method for treating psychopathology through dialogue between a patient and a psychoanalyst.

Phallic Stage

A phase in Freudian psychosexual development, occurring roughly between the ages of three and six, where the libido is focused on the genital area.

Psychosexual Development

A theory proposed by Freud, outlining the stages of development from infancy through adulthood in which sexual energy (libido) is focused on different areas of the body.

Penis Envy

In Freudian theory, a female desire to have a penis.