Use the Information for the Question(s)below

question 34

Essay

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 40% 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 $10.80 per share following the announcement,then the present value of BBB's financial distress costs is closest to:

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Definitions:

NPV Rule

The principle that an investment is considered acceptable if its net present value (NPV) is positive, under the context of discounted cash flow analysis.

Decision-Maker

An individual or group responsible for making choices that will impact themselves or others, often involving allocation of resources or resolutions in the face of challenges.

Zero NPV

A scenario in which the net present value of a project or investment is zero, indicating that the projected cash flows exactly discount the initial investment, showing neither a loss nor a gain.

Multiple IRRs

A phenomenon that occurs when there is more than one internal rate of return for a project due to changing cash flow signs over the project's lifetime.