QUESTION 5

1. B 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 B Company issues $100 of equity and uses it to make a permanent reduction in the company's debt? Assume a 21 percent marginal corporate tax rate.

   	A.	-$21
   	B.	-$42
   	C.	$21
   	D.	0