Question

The current value of a firm is 838,300 dollars and it is 100% equity financed. The...

The current value of a firm is 838,300 dollars and it is 100% equity financed. The firm is considering restructuring so that it is 80% debt financed. If the firm's corporate tax rate is 0.8, the typical personal tax rate of an investor in the firm's stock is 0.2, and the typical tax rate for an investor in the firm's debt is 0.2 what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy.

670,640

1,374,812

167,660

1,676,600

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Value of a levered firm = {V}+{V}*{P}*(1 - ( 1-{Tc})*(1-{Ts})/(1-{Td}) )/100

=  838,300+(838,300 * 80%)*(1 - ( 1-0.8)*{(1-0.8})/(1-0.2)}/100

= 1,374,812

Option 1,374,812

Add a comment
Know the answer?
Add Answer to:
The current value of a firm is 838,300 dollars and it is 100% equity financed. The...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Question 7 (1 point) The current value of a firm is 467,000 dollars and it is...

    Question 7 (1 point) The current value of a firm is 467,000 dollars and it is 100% equity financed. The firm is considering restructuring so that it is 60% debt financed. If the firm's corporate tax rate is 0.2, what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy. Your Answer: Answer Question 8 (1 point) The current value of a firm is 95.000 dollars and it is 100%...

  • 6- Dirty Don's Bicycle Shop is current financed with 100% equity. The firm currently has 100,000...

    6- Dirty Don's Bicycle Shop is current financed with 100% equity. The firm currently has 100,000 shares of common stock outstanding, selling for $50 per share. Don is considering a capital restructuring project, where the firm would be financed with 45% debt and 55% equity. How many bonds would Don have to sell at par value? (Remember that par value of a bond is $1,000).

  • Overnight Publishing Company (OPC) has $4.3 million in excess cash. The firm plans to use this...

    Overnight Publishing Company (OPC) has $4.3 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm's debt is held by one institution that is willing to sell it back to OPC for $4.3 million The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use...

  • Which of the following statements concerning capital structure theory is NOT CORRECT? The major contribution of...

    Which of the following statements concerning capital structure theory is NOT CORRECT? The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt. Under MM with zero taxes, financial leverage has no effect on a firm's value. Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt. Under...

  • C-2 Levered Value Overnight Publishing Company (OPC) has $4.2 million in excess cash. The firm plans...

    C-2 Levered Value Overnight Publishing Company (OPC) has $4.2 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm's debt is held by one institution that is willing to sell it back to OPC for $4.2 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the...

  • The Miller-Modigliani Arguments Firm U is all-equity financed, while Firm L is both debt- and equity-financed....

    The Miller-Modigliani Arguments Firm U is all-equity financed, while Firm L is both debt- and equity-financed. The following table gives some relevant data on the two firms: (No Taxes)                                                                                                 Firm U Firm L Annual expected future cash flow $5 M $5 M Cost of equity (rE) 15% 16% Market value of debt (D) 0 $15 M Cost of debt (rD) N/A 12% Market value of equity (E) ? ? Market value of the firm (V) ? ? Weighted average...

  • 8. M&M and Miller models After Modigliani and Miller's (MM) original no-tax theory, they went on ...

    8. M&M and Miller models After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes Complete the following sentence based on your understanding of the MM Model with corporate taxes: the benefit When personal taxes are included in the MM model, the taxes that stockholders pay on their bond and equity income created by the tax...

  • Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $96 a...

    Reliable Gearing currently is all-equity-financed. It has 10,000 shares of equity outstanding, selling at $96 a share. The firm is considering a capital restructuring. The low-debt plan calls for a debt issue of $192,000 with the proceeds used to buy back stock. The high- debt plan would exchange $384,000 of debt for equity. The debt will pay an interest rate of 11%. The firm pays no taxes. a. What will be the debt-to-equity ratio if it borrows $192,000? (Round your...

  • You are analyzing a firm that is financed with 65 percent debt and 35 percent equity....

    You are analyzing a firm that is financed with 65 percent debt and 35 percent equity. The current cost of debt financing is 10 percent, but due to a recent downgrade by the rating agencies, the firm's cost of debt is expected to increase to 12 percent immediately. How will this increase change the firm's weighted average cost of capital if you ignore taxes? (Round answer to 2 decimal places, eg. 15.25%.) Ignoring taxes firm's weighted average cost of capital...

  • Overnight Publishing Company (OPC) has $4.5 million in excess cash. The firm plans to use this...

    Overnight Publishing Company (OPC) has $4.5 million in excess cash. The firm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The firm's debt is held by one institution that is willing to sell it back to OPC for $4.5 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT