Question
The L&L company questions its financing policy. L&L is partly financed by debt with financial leverage or Gearing (D/K = D/EL) in market value equal
The L&L company questions its financing policy. L&L is partly financed by debt with financial leverage or Gearing (D/K = D/EL) in market value equal to 2. Its total value (VL in market value) is estimated at 2700 million composed of 1800 million in debt and 900 million in equity (market cap: EL).
The CFO of L&L believes that the company is too indebted and wishes to issue new shares for 1,150 million in order to prepay part of its debt for the same amount.
Following this change in capital structure, what would be the new financial leverage (Gearing:D/EL) in market value of the L&L company? The IS rate is 33.1/3%.
To do this, you would rely on Modigliani & Miller with tax: You would first have to calculate the value of the business without debt (VU); calculate the new market value of the company L&L (VL) with the new financing structure and deduce the new equity value at market value (EL). Enter only the Gearing value in the box below. The figure must be filled in with 4 decimal places (not in %). Use the "." and not the ",".
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