Question

The current value of a firm is 467,000 dollars and it is 100% equity financed. The firm is considering restructuring so that it is 60% debt financed. If the firm's corporate tax rate is 0.2, what will be the new value of the firm under the MM theory with corporate taxes but no possibility of bankruptcy.

Answer 1

The new value of the firm with 60% debt financing is $647,222.22.

Step-by-step explanation:

Under the MM theory with corporate taxes, the new value of the firm can be calculated using the formula:

New Value of Firm = Value of Firm / (1 - Debt Percentage x (1 - Tax Rate))

Given that the value of the firm is $467,000 and the firm is considering restructuring to be 60% debt financed, the new value of the firm would be:

New Value of Firm = 467,000 / (1 - 0.60 x (1 - 0.2))

Simplifying the equation gives:

New Value of Firm = 467,000 / 0.72 = $647,222.22