Neal Enterprises has no debt. Its current total value is $73.6 million. Assume d
ID: 2787245 • Letter: N
Question
Neal Enterprises has no debt. Its current total value is $73.6 million. Assume debt proceeds are used to repurchase equity.
Ignoring taxes, what will the company’s value be if it sells $33.8 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm: ?
Suppose now that the company’s tax rate is 36 percent. What will its overall value be if it sells $33.8 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm: ?
Requirement 1:Ignoring taxes, what will the company’s value be if it sells $33.8 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm: ?
Requirement 2:Suppose now that the company’s tax rate is 36 percent. What will its overall value be if it sells $33.8 million in debt? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)
Value of the firm: ?
Explanation / Answer
Solution:
No taxes:
VU = VL;
Value of the firm is $73.6 millons = $73,600,000
Debt = $33.8 million
Equity = firm value - debt = $73.6 million - $33.8 million = $39.8 million
Therefore Value of the firm = $39.8 millons + $33.8 million = $73,600,000
With taxes:
V = VU + TCD
TCD = Corporate tax rate for debt = 36% or 0.36
No taxes: VU = VL; Value of the firm is $73.6 million
With taxes: V = VU + TCD = $73.6 million + 0.36($33.8million) = $85.768 million
Therefore Value of the firm = $85,768,000
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