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Bird Enterprises has no debt. Its current total value is $48.4 million. Assume debt proceeds are used to repurchase equity. a

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Answer #1

Solution :-

(A)

Value of levered firm = value of unlevered firm + value of debt * tax rate

No Tax means we say tax is 0 , then value of levered firm = value of the unlevered firm.

In this case, if the firm sells $19.1 million in debt, the value of the firm remains at $48.4 million.

(B)

If the tax rate is instead 22%, then the value of the levered firm is given by:

value of levered firm = 48.4 million + 19.1 million * 22%

value of levered firm = 85.768 million

If there is any doubt please ask in comments

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