Assume that capital markets are perfect except for the existence of corporate taxes.Your firm pays 40% of earnings in taxes and you decide to issue $25 million in new debt and $25 million in new equity.Your ownership stake in the firm following these new issues of debt and equity is closest to:

Question

Quizplus · Accepted Answer

A)V^U = $75 million V^L = V^U + τ_cD = $75 + .40($25)= $85 million Owner's equity = value - debt - new equity = 85 - 25 - 25 = $35 million Total equity = owners equity + new equity = $35 + $25 = $60 million Owner's stake = 11ea7cce_3cd8_f52b_928c_3bc824651ea3_TB1626_11 = .5833 or 58.33%

Assume That Capital Markets Are Perfect Except for the Existence