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1 BUSE 2000/1: TUTORIAL 5 BLOCK 2 2018 1. Bombay Company's balance sheet is as follows: (NWC = net working capital; LTA = long term assets; D = debt; E= equity; V = firm value): 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 35% tax rate. a. +$140 b. +$70 c. $0 d. -$70 2. Assume the corporate tax rate is 30%. The firm has no debt in its capital structure. It is valued at $100 million. What would be the value of the firm if it issued $50 in perpetual debt and repurchased the equity? a. $65 b. $115 c. $100 d. None of the above 3. The relative tax advantage of debt with personal and corporate taxes is: Where: T C = Corporate tax rate; T PE = Personal tax rate on equity income; and T P = Personal tax rate on interest income.
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  • Fall '17
  • D. McClelland
  • Finance

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