Levy Corp. is an unlevered firm worth $507,000 (market value). There are 14,000 shares of stock outstanding. The company just announced that, to change thecapital structure, it will repurchase $22,400 worth of stock with borrowed fund in six months. The tax rate for the firm is 20%. If the stock market is efficient, which ofthe following is correct according to MM propositions?The stock price should not react to the repurchase because the repurchase has no impact on firm value.The stock price will not react to the repurchase upon the repurchase is announced.The stock price can react to the repurchase any time between announcement and implementation.The stock price will not react to the repurchase upon the repurchase is complete.

The M&M theorem with the presumption of perfectly efficient markets makes several assumptions,…

Answered: mase because the re e upon the repurch…

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Finance

mase because the re e upon the repurch y time between an

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter1: The Role And Objective Of Financial Management

Section: Chapter Questions

Problem 15QTD

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Question

Levy Corp. is an unlevered firm worth $507,000 (market value). There are 14,000 shares of stock outstanding. The company just announced that, to change the
capital structure, it will repurchase $22,400 worth of stock with borrowed fund in six months. The tax rate for the firm is 20%. If the stock market is efficient, which of
the following is correct according to MM propositions?
The stock price should not react to the repurchase because the repurchase has no impact on firm value.
The stock price will not react to the repurchase upon the repurchase is announced.
The stock price can react to the repurchase any time between announcement and implementation.
The stock price will not react to the repurchase upon the repurchase is complete.

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