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Calculation Of Change In Shareholders Wealth

Question

Assume these facts about a levered firm: market value of interest‐bearing debt = $370 and market value of common stock = $1,040. If the corporate income tax is 30% and Modigliani and Miller's theory of capital structure in a world with only a corporate income tax applies, calculate the market value of this firm if it were unlevered. If the firm were unlevered, the market value of the firm would be $1,040. Given the facts, what would the change in shareholders’ wealth equal if you recapitalized the firm by issuing $370 of common stock and buying back all of the $370 of interest‐bearing debt?

 

Summary

The question belongs to Finance and it discusses about calculating change in shareholders’ wealth by issuing additional stock and buying back interest bearing debt.

Total Word Count 39

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