Question

In a world where MM's assumptions are met, TCU currently does not borrow, and is expected to achieve pre-tax and interest earnings of VND 450 billion permanently. Tax rate 20%. Cost of equity at 15%. All subsequent profits are used to pay dividends. The company plans to restructure its capital by replacing 980 billion VND of equity with debt. Interest rate 8%. Calculate the equity value of TCU company after restructuring, ignoring financial distress costs.

Answer 1

The assumption implies that companies operating in the world of perfectly efficient markets do not pay any taxes, the trading of securities is executed without any transaction costs, bankruptcy is possible, but there are no bankruptcy costs, and information is perfectly symmetrical.