Ignoring taxes, what will the company’s value be if it sells $35.6 million in de
ID: 2761782 • Letter: I
Question
Ignoring taxes, what will the company’s value be if it sells $35.6 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Suppose now that the company’s tax rate is 34 percent. What will its overall value be if it sells $35.6 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Neal Enterprises has no debt. Its current total value is $77.2 million. Assume debt proceeds are used to repurchase equity.Explanation / Answer
The pure equity value of the business( no leverage), Vu (unlevered) = 77.2 Million
Req 1: When the company sells debt, the value of the compnay will be
VL = Vu + Tc* D
where Vu = value of unlevered company = 77.2 Million
Now, we ignore, the taxes, that mean there is no tax advantage of debt.
So Tc* D = 0 Since Tc (the tax rate is 0)
VL = VU + 0 = 77.2 Million = $77,200,000
Value of the company remains unchanged and is 77.2 Million or $77,200,000
Value of company = $77,200,000
Req 2: Tax rate, Tc = 34% = 0.34
Hence VL = Vu + Tc D
VL = 77,200,000 + 35,600,000*0.34 = $89,304,000
Overall Value = $89,304,000