Big Blue Banana (BBB) is a clothing retailer with a current share price of $20 and with 30 million shares outstanding. Suppose BBB announces a plan to lower its corporate taxes by borrowing $81 million and using the proceeds to repurchase shares. Suppose BBB pays corporate taxes of 35% and that shareholders expect the change in debt to be permanent. Assuming that that capital markets are perfect except for the the existence of corporate taxes, what is the share price of BBB after this announcement?

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter15: Capital Structure Decisions
Section: Chapter Questions
Problem 11P: The Rivoli Company has no debt outstanding, and its financial position is given by the following...
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Big Blue Banana (BBB) is a clothing retailer with
a current share price of $20 and with 30 million
shares outstanding. Suppose BBB announces a plan to
lower its corporate taxes by borrowing $81 million
and using the proceeds to repurchase shares.
Suppose BBB pays corporate taxes of 35% and that
shareholders expect the change in debt to be
permanent. Assuming that
that capital markets are
perfect except for the
the existence of corporate
taxes, what is the share price of BBB after this
announcement?
Transcribed Image Text:Big Blue Banana (BBB) is a clothing retailer with a current share price of $20 and with 30 million shares outstanding. Suppose BBB announces a plan to lower its corporate taxes by borrowing $81 million and using the proceeds to repurchase shares. Suppose BBB pays corporate taxes of 35% and that shareholders expect the change in debt to be permanent. Assuming that that capital markets are perfect except for the the existence of corporate taxes, what is the share price of BBB after this announcement?
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