Bombay Company's Balance Sheet Is as Follows

question 61

Multiple Choice

Bombay Company's balance sheet is as follows:
(NWC = net working capital; LTA = long term assets; D = debt; E = equity; V = firm value) :

According to MM's Proposition I corrected for taxes, what will be the change in company value if Bombay issues $200 of equity and uses it to make a permanent reduction in the company's debt? Assume a 35% tax rate.

• A) +$140
• B) +$70
• C) $0
• D) -$70

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Definitions:

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of the good that suppliers are willing to sell.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded by consumers.

Market Price

The current price at which an asset or service can be bought or sold in a competitive marketplace.

Consumer Surplus

The difference between the total amount consumers are willing and able to pay for a good or service versus the total amount they actually pay.