Mosel Wine Company is currently 100% family owned and has no debt. The family is considering for the company to (i) raise debt to buy‐out part of the family’s equity and (ii) go public to sell part of its equity to new equity/stockmarket investors, while (iii) maintaining ownership of $2 million in the company’s equity post IPO. Investment bankers estimate the total market value of the company to be $10 million at zero debt. The PV of tax‐shield benefits are estimated at 22% of the amount of debt borrowed and shown below together with the PV of bankruptcy costs: (all figures in $ millions) Value of debt raised Value of unlevered firm PV of tax shield benefits PV of bankruptcy costs 0 10 0 0 1 10 0,22 0 2 10 0,44 0,05 3 10 0,66 0,1 4 10 0,88 0,2 5 10 1,1 0,4 6 10 1,32 0,7 7 10 1,54 1,1 (3a) What is the optimal debt level that will maximize the total levered firm value?
Mosel Wine Company is currently 100% family owned and has no debt. The family is considering
for the company to (i) raise debt to buy‐out part of the family’s equity and (ii) go public to sell part
of its equity to new equity/stockmarket investors, while (iii) maintaining ownership of $2 million
in the company’s equity post IPO. Investment bankers estimate the total market value of the
company to be $10 million at zero debt. The PV of tax‐shield benefits are estimated at 22% of the
amount of debt borrowed and shown below together with the PV of bankruptcy costs:
(all figures in $ millions)
Value of debt
raised
Value of
unlevered
firm
PV of tax
shield
benefits
PV of
bankruptcy
costs
0 10 0 0
1 10 0,22 0
2 10 0,44 0,05
3 10 0,66 0,1
4 10 0,88 0,2
5 10 1,1 0,4
6 10 1,32 0,7
7 10 1,54 1,1
(3a) What is the optimal debt level that will maximize the total levered firm value?
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