34 XYZ expects its EBIT to remain at the same level for ever and all its earning

Question

34 XYZ expects its EBIT to remain at the same level for ever and all its earning will be paid out as dividends; currently it has no debt, has 1000 shares, its dividend is $1.50, and its cost of equity capital is 15%. XYZ decides to borrow the sum of $4000 at interest rate of 5% to repurchase its stock. (The company pays no taxes). Assuming MM Propositions I and II hold, (a) This policy will increase the price of common stock, while leaving the total value of equity unchanged (b) This policy will leave the price of common stock unchanged, while reducing the total value of equity (c) This policy will increase the price of common stock, while reducing the total value of equity

Explanation / Answer

a) This policy will increase the price of common stock, while leaving the total value of equity unchanged according to MM propositions value does not change

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.