A Firm Is All Equity with 5,000 Shares Outstanding Worth

question 25

Multiple Choice

A firm is all equity with 5,000 shares outstanding worth $7 each.They are planning on issuing $10,000 of new perpetual debt at the 8% market rate of interest.The effective tax rate is 25%.What is the change in equity value if they make the debt for equity exchange?

• A) $.50 per share
• B) $200
• C) $800
• D) $.16 per share

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Definitions:

Appeasement

A conflict resolution strategy where one party attempts to pacify another by conceding to their demands, often to avoid conflict.

Competition

A situation in which individuals or entities strive against each other to achieve a goal that cannot be shared.

Cooperative Reactions

Actions undertaken by individuals or groups that are designed to work together in a mutually beneficial manner.

Ingroup-Outgroup Bias

The tendency to favor members of one's own group (ingroup) over those from different groups (outgroup).