Mercury is an all equity financed firm. It has a total market value of 6587000 euros. Mercury's
Question:
Mercury is an all equity financed firm. It has a total market value of 6587000 euros. Mercury's CFO has heard that it would be possible to increase shareholder's wealth by issuing debt and repurchasing equity. Therefore, Mercury will issue debt and use the proceeds to repurchase equity.
Compute the debt-generated tax-shield, the market value of Mercury's assets (V) and equity (E) and the shareholders' wealth after the debt issue for the following scenarios:
a) A 950000 euros debt issue.
b) A debt issue to achieve a debt ratio (D/V) of 25%.
Assumptions: Modigliani and Miller's theory holds with taxes, there is no growth and the level of debt is expected to be permanent. Corporate tax rate is 30%.
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta