1F.5
5.Your company is thinking of raising $10 million dollars by issuing debt with a 10% coupon. Your tax rate is 40% and the debt will be considered to be permanent. What is the total increase in the value of the firm? (5 pts)
(5 cont.) If your company had $100 million in equity and $50 million in debt before issuing the new debt, what is the new value of equity and debt? (4 pts)
All of the value increase from the interest tax shield goes to the old equity holders, so equity goes to $104 million. Debt increases by the $10 million new debt to $60 million.