Question

1. The Boring Corporation is currently valued at $900 million, but management wants to completely pay off its perpetual debt of $300 million. Boring is subject to a 30 percent marginal tax rate. If Boring pays off its debt, what will be the total value of its equity? (10 points)

Answer 1

Given,

Current value = $900 million or $900,000,000

Perpetual debt = $300 million or $300,000,000

Tax rate = 30%

Solution :-

Value after recapitalisation = Current value - (perpetual debt x tax rate)

= $900,000,000 - ($300,000,000 x 30%)

= $900,000,000 - $90,000,000 = $810,000,000

After recapitalisation the company would become all equity company.

So, Value after recapitalisation will be the total value of equity.

Total value of equity = $810,000,000