question archive The Bellwood Company is financed entirely with equity
The Bellwood Company is financed entirely with equity
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The Bellwood Company is financed entirely with equity. The company is considering a loan of $4.1 million. The loan will be repaid in equal principal installments over the next two years and has an interest rate of 7 percent. The company's tax rate is 25 percent.
According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan?
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Increase in the value of the company after the loan= $ 1,025,000 or
$1.025 million
Step-by-step explanation
As per MM Proposition I with taxes, the value of levered firm increases by the value of tax on debt taken.
So Value of levered firm= Value of unlevered firm+ Tax rate*Debt taken
Increase in the value
=Tax rate*Debt
= 25%* 4100000
= $ 1,025,000
=$1.025 million
