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Bombay Company's book and market value balance sheets are as follows: (NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value): Book Values         Market Values                     NWC   200     500   D NWC   200     500   D LTA   2,300     2,00   E LTA   2,800     2,500   E     2,500     2,500

Bombay Company's book and market value balance sheets are as follows: (NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value): Book Values         Market Values                     NWC   200     500   D NWC   200     500   D LTA   2,300     2,00   E LTA   2,800     2,500   E     2,500     2,500

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Bombay Company's book and market value balance sheets are as follows:

(NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value):

Book Values         Market Values                    
NWC   200     500   D NWC   200     500   D
LTA   2,300     2,00   E LTA   2,800     2,500   E
    2,500     2,500   V     3,000     3,000   V


According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt? Assume a 21 percent marginal corporate tax rate.

 

 

Multiple Choice

 A) +$70

 B) −$42

 C) $0

 D) +$140

 

Please show your work

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