ABC S.A. has debt in its financing structure. This company expects net operating income (NFOI) of...

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ABC S.A. has debt in its financing structure. This company expects net operating income (NFOI) of $2,000 million in one more year and every year-end thereafter in perpetuity. Its equity valuation is $10,000 million. On other hand, you estimate that this company is borrowing at an interest rate of 8% per annum and thus can currently generate a present value of tax subsidy, resulting from tax savings from interest expense of debt incurred, valued at $675 million. Tax rate is 27%. Risk-free rate is 3% per annum, while expected return for market portfolio is 10% per year. With this background and based on propositions of Modigliani and Miller (1963) and CAPM, what is value of DEBT of ABC S.A.? ABC S.A. has debt in its financing structure. This company expects net operating income (NFOI) of $2,000 million in one more year and every year-end thereafter in perpetuity. Its equity valuation is $10,000 million. On other hand, you estimate that this company is borrowing at an interest rate of 8% per annum and thus can currently generate a present value of tax subsidy, resulting from tax savings from interest expense of debt incurred, valued at $675 million. Tax rate is 27%. Risk-free rate is 3% per annum, while expected return for market portfolio is 10% per year. With this background and based on propositions of Modigliani and Miller (1963) and CAPM, what is value of DEBT of ABC S.A.?

Answer rating: 100% (QA)

SOLUTION According to the Modigliani and Miller MM propositions the value of a company is not affected by its financing structure when there are no ta... View the full answer