MM Proposition 1: No taxes
Hi guys, i have a question over the application of MM..
Assuming perfect capital markets; Company A is an all-equity company, with share price at $10. It announces to issue debt of $100m to repurchase shares.
By MM, the share price of Company A after announcement of this debt issuance should remain at $10. And the reason behind this is Value(levered firm) = Value(unlevered firm).
While i agree that the firm value stays the same, wouldn’t the market of value equity change as a result of the debt issuance (i.e Equity value goes down because debt went up, overall value stays same). So, wouldn’t share price change accordingly?
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