Charisma, Inc., has debt outstanding with a face value of $6.2 million. The value of the firm if it were entirely financed by equity would be $29.9 million. The company also has 425,000 shares of stock outstanding that sell at a price of $58 per share. The corporate tax rate is 22 percent. What is the decrease in the value of the company due to expected bankruptcy costs

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Fry

Business

24 December, 05:02

Charisma, Inc., has debt outstanding with a face value of $6.2 million. The value of the firm if it were entirely financed by equity would be $29.9 million. The company also has 425,000 shares of stock outstanding that sell at a price of $58 per share. The corporate tax rate is 22 percent. What is the decrease in the value of the company due to expected bankruptcy costs

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Nora · Answer 1

Decrease in value of company due to expected bankruptcy cost = $414,000

Explanation:

As per the data given in the question,

According to M & M proportional I with taxes,

Levered firm value is = Equity + Debt

= $29,900,000 + 0.22 * $6,200,000

= $31,264,000

Market value of the firm = market value of debt + market value of equity

= $6,200,000 + 425,000 * $58

= $30,850,000

Decrease in value of company due to expected bankruptcy cost = $31,264,000 - $30,850,000

= $414,000