Monvelo is a company that produces bicycles located in the south of France. It has 3 0
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Question:
Monvelo is a company that produces bicycles located in the south of France. It has
million shares outstanding with a market price of per share, million in debt and
million in excess cash. Monvelo has had consistently stable earnings and pays a
tax rate. Management plans to reduce its debt to zero permanently and will finance it by
using million of its excess cash and by raising million through issuing equity.
Consider a Modigliani and Miller MM world with taxes, ie ignore all other imperfections
in this question.
a Before the change in capital structure, what is the present value of the tax shield
associated to holding million in excess cash if this amount was supposed to be
maintained permanently?
b What is the share price, number of shares outstanding, market value of equity, and
market value of net debt after the announcement of the change in capital structure,
but before the company buys back its debt?
c What is the share price, number of shares outstanding, market value of equity, and
market value of net debt after the issuance of equity, but before the company uses
the proceeds of the equity issuance plus the excess cash to buy back its debt?
d What is the share price, number of shares outstanding, market value of equity, and
market value of net debt after the company uses the proceeds of the equity
issuance plus the excess cash to buy back its debt?
Related Book For
Corporate Finance A Focused Approach
ISBN: 978-1439078082
4th Edition
Authors: Michael C. Ehrhardt, Eugene F. Brigham
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