Consider the Yy Company in a world that of perfect capital markets. This world h

Question

Consider the Yy Company in a world that of perfect capital markets. This world has no personal taxes, all investors have homogeneous expectations, no bankruptcy costs, and M&M’s with no-tax theory of capital structure is true. The Company Yy is financed has the following market value balance sheet: Assets = $ 210, Equity =$143, and the remainder of the firm is financed with Debt. Now the firm repurchases half of the equity. To pay for the repurchase, the firm issues debt. What is the new value off the firm?

Explanation / Answer

Value of total Assets = $251

Value of equity = $143

Value of debt = $108

Company planning issue debt and use the proceeds in repurchase the half of the stock. Since there is not provision of taxation in economy. So total value of debt issue for repurchase of half of stock is value of equity.

Total value of debt issue = value of equity repurchase

                                        = $143 / 2

                                        = $71.5

So, Total value of debt issue is $71.50

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