Ignoring taxes, what will the company’s value be if it sells $33.6 million in de
ID: 2762231 • Letter: I
Question
Ignoring taxes, what will the company’s value be if it sells $33.6 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 38 percent. What will its overall value be if it sells $33.6 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 $73.2 million. Assume debt proceeds are used to repurchase equity.Explanation / Answer
The Unlevered value Neal enterprises = Vu= 73.2 Million
Req 1:
According to MM Model,
Value of levered firm (VL) = Value of unlevered firm (Vu) + Tax advantage of debt (Tc* D)
VL = Vu + Tc*D
Now the new Debt (D) is 33.6 Million. However, since there are no taxes(Tc), the term Tc* D = 0
VL= Vu + 0 = Vu = 73.2 Million
Hence when there are no taxes, the values of the firm after rasing 33.6 million dent still remains = 73.2 Million = $73,200,000
Req2: VL = Vu + Tc*D
VL = 73,200,000 + 0.38* 33,600,000 =$ 85,968,000
So Value of levered firm with taxes = $ 85,968,000