Monvelo is a company that produces bicycles located in the south of France. It has $30$

million shares outstanding with a market price of $10$ per share, $50$ million in debt and

$30$ million in excess cash. Monvelo has had consistently stable earnings and pays a $25\%$

tax rate. Management plans to reduce its debt to zero permanently and will finance it by

using $25$ million of its excess cash and by raising $25$ million through issuing equity.

Consider a Modigliani and Miller $($MM$)$ world with taxes, i$.$e$.,$ ignore all other imperfections

in this question.

a$)$ Before the change in capital structure, what is the present value of the tax shield

associated to holding $30$ million in excess cash if this amount was supposed to be

maintained permanently?

  

 

b$)$ What is the share price, number of shares outstanding, market value of equity, and

market value of net debt after the announcement of the change in capital structure,

but before the company buys back its debt?

  

 

c$)$ What is the share price, number of shares outstanding, market value of equity, and

market value of net debt after the issuance of equity, but before the company uses

the proceeds of the equity issuance plus the excess cash to buy back its debt?

  

 

d$)$ What is the share price, number of shares outstanding, market value of equity, and

market value of net debt after the company uses the proceeds of the equity

issuance plus the excess cash to buy back its debt?