The Maxwell Company is financed entirely with equity. The company is considering

Question

The Maxwell Company is financed entirely with equity. The company is considering a loan of $1.83 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 8 percent. The company’s tax rate is 35 percent.

According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Accoeding to MM proposition I with taxes:

Value of levered firm= avlue of unlevered firm+(debt*tax rate)

Here the increase in value of company after loan=0.35*1.83*10^6=$640,500

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