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A firm has a currentmarketvalueofINR250 crores. The current cost of equity is 15%and the tax rate...

A firm has a currentmarketvalueofINR250 crores. The current cost of equity is 15%and the tax rate is 20 percent. If the firm has announced to issue a per- petual debt of INR 50 crores at 6% interest rate to change the capital structure of the firm, what is the market value of the firm after this announcement?

Solutions

Expert Solution

When an unlevered firm takes on debt, using the M&M proposition the value of the firm goes up the amount of interest tax shield.

As the debt is a perpetual debt,

Value of the firm = Value of unlevered equity + Debt * Tax rate

= 250 Cr + 50 Cr * 20%

= 250 + 10

= 260 Crores is the Value of firm after announcement.

jeff jeffy answered 2 years ago
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