Question

Three Piggies Enterprises has no debt. Its current total value is $74 million. Assume debt proceeds are used to repurchase equity. Ignoring taxes, what will the company’s value be if it sells $34 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.) Value of the firm $ Suppose now that the company’s tax rate is 35 percent. What will its overall value be if it sells $34 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.) Value of the firm $

Answer 1

1st case - $74,000,000

2nd case - $85,900,000

Step-by-step explanation:

1st case:

In first case, the value of the firm would be $74,000,000 as the tax part is ignored

2nd case:

In the second case, the computation of the value of firm would be shown below:

= Total current value + debt amount × tax rate

= $74,000,000 + $34,000,000 × 35%

= $74,000,000 +11,900,000

= $85,900,000

Since in the second case, we considered the tax part so we multiply the tax rate with the debt amount.