fm16 21 - $531,915 in short-term investments. Before Debt...

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Mini Case: 16 - 21 The situation before the recap is: Before Debt Vop $2,500,000 + ST Inv. 0 VTotal $2,500,000 Debt 0 S $2,500,000 n 100,000 P $25.00 S $2,500,000 Cash distr. 0 Wealth $2,500,000 The stock price is $25 and the total wealth of shareholders is $2,500,000. Now consider the situation if the firm moves to a capital structure with w d = 20% by issuing $531,915 in debt but has not yet repurchased equity. The firm’s value of operations increases because its WACC decreases. The firm also temporarily has
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Unformatted text preview: $531,915 in short-term investments. Before Debt After Debt, Before Rep. Vop $2,500,000 $2,659,574 + ST Inv. 531,915 VTotal $2,500,000 $3,191,489 Debt 531,915 S $2,500,000 $2,659,574 n 100,000 100,000 P $25.00 $26.60 S $2,500,000 $2,659,574 Cash distr. Wealth $2,500,000 $2,659,574 Notice that the stock price increases and the wealth of shareholders increases....
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