Bombay Company's balance sheet is 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 35% tax rate.
A) +$140
B) +$70
C) $0
D) -$70

Question

Bombay Company's balance sheet is 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 35% tax rate.
A) +$140 
B) +$70 
C) $0 
D) -$70

Quizplus · Accepted Answer

The Answer of Bombay Company's balance sheet is 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 35% tax rate.
A) +$140 
B) +$70 
C) $0 
D) -$70

Bombay Company's Balance Sheet Is as Follows