Swan Specialty Cycles is currently financed with 50 percent debt and 50 percent equity. The firm pays $260 each year to its debt investors (at a 12 percent cost of debt), and the debt has no maturity date.
What will be the value of the equity if the firm repurchases all of its debt and raises the funds to do this by issuing equity?
Assume that all of the assumptions in Modigliani and Miller's Proposition 1 hold.