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What is the stock price before and after the change

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Reference no: EM132895105

Question - Company M's "simplified" balance sheets using book and market values are currently as follows.

Balance sheet (book value in millions)

Net working capital 1473  Long-term assets 14935 Total assets 16408

Book equity 11139 Long-term debt 5269 Total liabilities 16408

Balance sheet (market value in millions)

Net working capital 1473  Market value long-term assets 51212 Total assets 52685

Market equity 47416 Long-term debt 5269 Total liabilities 52685

Suppose that M decides to move to a 50% book debt-to-value ratio by issuing debt and using the proceeds to repurchase shares. The corporate tax rate is 40%; consider only corporate taxes. Now construct M's balance sheet (with market values only) to reflect the new capital structure, i.e., add an item called PV (additional tax shields) on the asset side of the balance sheet. Before it changes its capital structure, M has 1248 million shares outstanding. What is the stock price before and after the change?

Reference no: EM132895105

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