Question

Mizer Corp. currently has 80 million shares worth $45 each and no debt. Mizer is considering issuing some debt and using the proceeds to pay a dividend, such that the scale of firm operations would not change. Debt would be sold at a fair price. Following are the possible debt amounts with corresponding effects on the firm:

Value of Debt	Present Value of Tax Shields	Present Value of Bankruptcy Costs
$400 million	$95 million	$5 million
$500 million	$180 million	$95 million
$1.7 billion	$165 million	$150 million
$1.3	$160 million	$500 million

No change is also a possibility. There are no other avenues through which capital structure impacts firm value. What should be the stock price per share after the dividend (there are no personal taxes)?

Answer 1

Value of Levered Firm = Value of unlevered Firm + PV of Tax Shields - PV of Bankruptcy Costs
Value of Unlevered Firm = (80 million x $45 per share	$3,600.00	Million
A	B	C	D	E= A-B+C-D	F = E/ 80 million
Value of Levered Firm (Millions)	Dividend Paid	Present Value of Tax Shields(Millions)	Present Value of Bankruptcy Costs(Millions)	Value of un-levered (millions)	Value Per Share
$3,600.00	$400.00	$95.00	$5.00	$3,290.00	$41.13	Per Share
$3,600.00	$500.00	$180.00	$95.00	$3,185.00	$39.81	Per Share
$3,600.00	$1,700.00	$165.00	$150.00	$1,915.00	$23.94	Per Share
$3,600.00	$1,300.00	$160.00	$500.00	$1,960.00	$24.50	Per Share