Question
IPS has a market firm value of $250M with 15% of its capital structure currently in debt . IPS decides to replace some existing equity
IPS has a market firm value of $250M with 15% of its capital structure currently in debt . IPS decides to replace some existing equity with new debt. The firms management plans to issue $50 million in new debt, which will perpetuate indefinitely (i.e., the new debt level is not temporary). This new debt will be issued with an interest rate of 7%. They will use the proceeds from this debt issue to pay existing shareholders a one-time special dividend. The change to the capital structure will cost the firm $5 million in transaction fees. After IPS makes this change, what will be the new value of the equity? Assume a tax rate of 35% and disregard any change in the present value of financial distress costs based on the capital structure change.
Group of answer choices
$17.5 million
$175 million
$205 million
$262.5 million
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started