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):

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 21 percent marginal corporate tax rate.

Question

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):

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 21 percent marginal corporate tax rate.

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):

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 21 percent marginal corporate tax rate.

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