The Bellwood Company is financed entirely with equity. The company is considering a loan of $3.9...

The Bellwood Company is financed entirely with equity. The company is considering a loan of $3.9 million. The loan will be repaid in equal principal installments over the next two years and has an interest rate of 9 percent. The company’s tax rate is 23 percent.

According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Expert Solution

Note :- in year 0, the balance of loan is $3,900,000 , so, intererst in year 1 will be on total loan of $3,900,000 .

In year 1, one principal installment will be paid which is half of total loan amount = $3,900,000 / 2 = $1,950,000 , so, the remaining loan balance is $1,950,000 and interest in year 2 is computed on this remaining balance.

jeff jeffy answered 1 year ago

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