There are two parts to this group assignment. First, you will assess the effect of a change in leverage by your firm on the book and market value balance sheets. Second, you will study the effects of changes irn leverage and sales on the income statements. Use the most current accounting data from COMPUSTAT to make your estimates. Handout #10 should serve as a guide in your efforts The first part of the assignment is based on the example on page 502 of the textbook in Chapter 17 (An Introduction to Debt Policy and Value), or Exhibit #1 in Handout #9 Here you will analyze the effects of recapitalizing the firm that you have been assigned using the Modigliani & Miller (1963) framework, to see the effects on the book and market value balance sheets, and on shareholder wealth gers of the firm are considering doubling the amount of long-term debt outstanding Assume that the mana You will need to create a condensed version of the book value balance sheet for your firm. For the long term debt account, be sure to combine the portions listed under both current and long-term liabilities. You will probably also want to break-out the Notes Payable from the other current accounts, which is useful for estimating the value of the tax-shield. Be sure to adjust the values of the current liabilities for the removal of these two accounts. You must then develop a market value balance sheet based on the current share prices. Estimate the firm's effective tax rate using historical data to determine the values of the tax shields Use the tax rate from your estimates of WACC in Homework #4A.] Then estimate the effect of doubling the book-value of long-term debt on both balance sheets Consider two cases for how the funds raised in this bond issue will be used. First, assume that all of the proceeds are paid-out as a special one-time dividend to all common stock holders. In the second scenario assume that the firm uses the funds raised to buy back some of their shares There are two parts to this group assignment. First, you will assess the effect of a change in leverage by your firm on the book and market value balance sheets. Second, you will study the effects of changes irn leverage and sales on the income statements. Use the most current accounting data from COMPUSTAT to make your estimates. Handout #10 should serve as a guide in your efforts The first part of the assignment is based on the example on page 502 of the textbook in Chapter 17 (An Introduction to Debt Policy and Value), or Exhibit #1 in Handout #9 Here you will analyze the effects of recapitalizing the firm that you have been assigned using the Modigliani & Miller (1963) framework, to see the effects on the book and market value balance sheets, and on shareholder wealth gers of the firm are considering doubling the amount of long-term debt outstanding Assume that the mana You will need to create a condensed version of the book value balance sheet for your firm. For the long term debt account, be sure to combine the portions listed under both current and long-term liabilities. You will probably also want to break-out the Notes Payable from the other current accounts, which is useful for estimating the value of the tax-shield. Be sure to adjust the values of the current liabilities for the removal of these two accounts. You must then develop a market value balance sheet based on the current share prices. Estimate the firm's effective tax rate using historical data to determine the values of the tax shields Use the tax rate from your estimates of WACC in Homework #4A.] Then estimate the effect of doubling the book-value of long-term debt on both balance sheets Consider two cases for how the funds raised in this bond issue will be used. First, assume that all of the proceeds are paid-out as a special one-time dividend to all common stock holders. In the second scenario assume that the firm uses the funds raised to buy back some of their shares
