Please step by step and thanks for occupying your time.
a. VL = E + D = 1,000,000 *13.5 + 6,250,000 = 19,750,000
b. Now, with The equation VL = VU +[ 1- (1-Tc)(1-Te)/(1-Ti)]* D
19,750,000 = Vu + [1-(1-0.3)(1-0.1)/(1-0.25)]*6,250,000
19,750,000 = Vu + 1,000,000
Vu = 18,750,000
c. No, the management was not correct. Paying up all the debt will result in reduction in the Value of the firm by 1,000,000. This is because of the tax advantage of debt. The risk of investing in the firm becomes lower and hence the return for shareholders will also be less due to lower risk.
d. Number of shares Outstanding = 6,250,000/13.5 + 1,000,000 = 1,462,963 shares
e. The government should try to make (1-Tc)(1-Te)/(1-Ti) = 1
(1-Tc)*(1-0.1)/(1-0.25) = 1
(1-Tc) *1.2 = 1
1-Tc =1/1.2
Tc = 1-0.83333
Tc = 0.1667 = 16.67%
The government should reduce the corporate tax rate to 16.67%
Please step by step and thanks for occupying your time. 4. Value and Debt Consider the...
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