ABC has 20 million shares outstanding, trading at $20 per share. ABC currently has no debt, but plans to borrow $100 million on a permanent basis. It would use the borrowed funds to repurchase shares. Upon the announcement of this plan, ABC's share price rose to $20.50. Assume that the discount rate on interest tax shields is 8% and the marginal corporate tax rate = 20%. What is ABC's cost of debt?

ABC has 20 million shares outstanding, trading at $20 per share. ABC currently has no debt, but plans to borrow $100 million on a permanent basis. It would use the borrowed funds to repurchase shares. Upon the announcement of this plan, ABC's share price rose to $20.50. Assume that the discount rate on interest tax shields is 8% and the marginal corporate tax rate = 20%. What is ABC's cost of debt?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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