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    Theoretical Question 1 - Company Do Sea

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    Rahul
    Company Do Sea currently has a market value of equity of €40 million with €24 million in debt. It announces plans to raise €20 million more in debt through a bank loan to finance future projects. This will increase total debt to €44 million and leave equity unchanged at €40 million, increasing overall firm value. Benefits to shareholders include potential project returns exceeding the cost of debt. However, more debt also increases financial risk. The bank may disapprove due to concerns over the company's ability to repay the additional debt.

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    Theoretical Question 1 - Company Do Sea

    Uploaded by

    Rahul
    7 views1 page
    Company Do Sea currently has a market value of equity of €40 million with €24 million in debt. It announces plans to raise €20 million more in debt through a bank loan to finance future projects. This will increase total debt to €44 million and leave equity unchanged at €40 million, increasing overall firm value. Benefits to shareholders include potential project returns exceeding the cost of debt. However, more debt also increases financial risk. The bank may disapprove due to concerns over the company's ability to repay the additional debt.

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    Theoretical question 1 - Company Do Sea

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    Company Do Sea currently has a market value of equity of €40 million with €24 million in debt. It announces plans to raise €20 million more in debt through a bank loan to finance future projects. This will increase total debt to €44 million and leave equity unchanged at €40 million, increasing overall firm value. Benefits to shareholders include potential project returns exceeding the cost of debt. However, more debt also increases financial risk. The bank may disapprove due to concerns over the company's ability to repay the additional debt.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    7 views1 page

    Theoretical Question 1 - Company Do Sea

    Uploaded by

    Rahul
    Company Do Sea currently has a market value of equity of €40 million with €24 million in debt. It announces plans to raise €20 million more in debt through a bank loan to finance future projects. This will increase total debt to €44 million and leave equity unchanged at €40 million, increasing overall firm value. Benefits to shareholders include potential project returns exceeding the cost of debt. However, more debt also increases financial risk. The bank may disapprove due to concerns over the company's ability to repay the additional debt.

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    of 1

    Please submit your answer with less than 500 words as a .

    pdf file

    [500 words maximum, equivalent to 1 word page: You are now playing the game of answer effectiveness.
    Incomplete answers will obviously not receive full points. Excessively long and redundant answers may
    earn you negative points. Write carefully and logically and do not surpass 500 words.]

    Theoretical Question 1 – Company Do Sea:

    Company Do Sea currently has a market value of equity of 40 million euros, with 10 million shares
    outstanding, and a D/E ratio of 0.6. The company announces that it intends to raise additional debt by
    asking for a 20 million € bank loan to finance future projects.

    Describe the market value balance sheet before and after the loan has been provided (i.e. provide the
    market value of assets, debt and equity at period 0 - before the announcement; and at period 1 - after the
    credit has been made available to the company). What are the benefits of this move to shareholders
    (quantify)? Why might this transaction be harmful to shareholders? What reasons could have led the bank
    to disapprove conceding this credit?

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