Look back at the Merck example in Section 14–1. Suppose Merck increases its long-term debt to $10 billion. It uses the additional debt to repurchase shares. Reconstruct Table 14.3(b) with the new capital structure. How much additional value is added for Merck shareholders if the table’s assumptions are correct?
TABLE 14.3b Balance sheets for Merck with additional $1 billion of long-term debt substituted for stockholders’ equity (figures in millions).
Book Values | |||
Net working capital | $ 4,986.2 | $ 4,943.3 | Long-term debt |
|
| 10,175.4 | Other long-term liabilities |
Long-term assets | 27,890.8 | 17,758.3 | Equity |
Total assets | $32,877.0 | $32,877.0 | Total value |
Market Values | |||
Net working capital | $ 4,986.2 | $ 4,943.3 | Long-term debt |
PV interest tax shield | 1,730.2 | 10,175.4 | Other long-term liabilities |
Long-term assets | 72,680.6 | 64,278.3 | Equity |
Total assets | $79,397.0 | $79,397.0 | Total value |
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