Bombay Company's book and market value balance sheets are as follows: (NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value):
$ \quad$$\underline {\text { Book Values }}$ $ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$ $\underline {\text { Market Values }}$
$\begin{array}{lrrrlrrr}
\text { NWC } & 200 & 500 & \text { D } & \text { NWC } & 200 & 500 & \text { D } \
\text { LTA } & \underline {2,300} & \underline {2,000} & \text { E } & \text { LTA } & \underline {2,800} & \underline {2,500} & \text { E }\
&2,500 & 2,500 & V & &3,000 & 3,000 & V\
\end{array}$ According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt? Assume a 35 percent marginal corporate tax rate.

Question

Quizplus · Accepted Answer

The Answer of Bombay Company's book and market value balance sheets are as follows: (NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value):
$ \quad$$\underline {\text { Book Values }}$ $ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$$ \quad$ $\underline {\text { Market Values }}$
$\begin{array}{lrrrlrrr}
\text { NWC } & 200 & 500 & \text { D } & \text { NWC } & 200 & 500 & \text { D } \
\text { LTA } & \underline {2,300} & \underline {2,000} & \text { E } & \text { LTA } & \underline {2,800} & \underline {2,500} & \text { E }\
&2,500 & 2,500 & V & &3,000 & 3,000 & V\
\end{array}$ According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt? Assume a 35 percent marginal corporate tax rate.

Bombay Company's Book and Market Value Balance Sheets Are as Follows