Problem

Look back at the Merck example in Section 14–1. Suppose Merck increases its long-term debt...

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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Solutions For Problems in Chapter 14