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Assuming no market imperfections or taxes, a firm has $4,000,000 in equity outstanding and $3,000,000 in...

Assuming no market imperfections or taxes, a firm has $4,000,000 in equity outstanding and $3,000,000 in debt. The firm plans to issue another $2,000,000 of equity and use all the proceeds to buyback debt. What will be the new total market value of the firm?

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Answer #1

When there are no market inperfections or taxes, the total market value of firm does not change.

The total market value of firm = value of equity + value of debt = 4000000 + 3000000 = 7000000

Now

if 2000000 worth of equity is issued and debt is redeemed

The value of equity will increase by 2000000 and value of debt will decrease by 2000000

The total market value of firm = value of equity + value of debt = 6000000 + 1000000 = 7000000

Answer : New market value = 7000000 [Thumbs up please]

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