Assume a Perfect M&M World

question 42

Multiple Choice

Assume a perfect M&M world. A firm is currently valued at $500 million, $200 million of which is debt (including non-financial debt) . It pays out $10 million in dividends and $20
Million to service its existing debt. It also raises another $60 million in debt and uses some of it
To repurchase $50 million of its common shares. What is the new value of the firm, and what is
Its new debt-equity ratio?

• A)Value = $510 million; Debt-equity = 40.0%
• B)Value = $480 million; Debt-equity = 50.0%
• C)Value = $360 million; Debt-equity = 55.6%
• D)Value = $480 million; Debt-equity = 100.0%

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Definitions:

Evidence-based Management

The practice of making managerial decisions with a focus on scientific findings and empirical evidence to ensure effectiveness and efficiency.

Incubation Stage

A phase in the development of a startup or new project characterized by experimentation, ideation, and the initial development of a business model.

Creative Decision Making

The process of exploring alternative solutions to problems or opportunities in novel and nontraditional ways to arrive at effective solutions.

Reversal Technique

A strategy used in problem-solving or creativity that involves considering the opposite of what is expected or assumed.