5F.8
8. Your company is worth $200 million and is financed 100% with equity. You think that it may be value-increasing to replace $80 million of the equity with $80 million in debt.
a. How could such a capital structure change affect the value of the company? [3]
b. Assume that the tax rate on your company’s profits is 34%. The debt would be permanent and have a 9% coupon. Your investment bankers will charge you $1 million to issue $80 million in debt and repurchase $80 million in equity. The capital structure shift won’t change your investment plans. What will be the new value of your company after the change in capital structure? [6]
c. What is the new total value of your equity? What is the total value of your debt? [6]