PURSUIT CO (JUN 11 ADAPTED)- Kaplan Exam kit

Sir again in this question’s part c’s “iii) Estimates the amount of debt finance needed, in addition to the cash reserves, to acquire Fodder Co and concludes whether Pursuit Co’s current capital structure can be maintained.”

“Answer: The current value of Pursuit Co is $140,000,000, of which the market value of equity and debt are $70,000,000 each. The value of the combined company before paying Fodder Co shareholders is approximately $189,169,000, and if the capital structure is maintained, the market values of debt and equity will be approximately $94,584,500each. This is an increase of approximately $24,584,500 in the debt capacity.

The amount payable for Fodder Co’s debt obligations and to the shareholders including the premium is approximately $49,116,500 [4,009 + 36,086 × 1.25]. If $24,584,500 is paid using the extra debt capacity and $20,000,000 using cash reserves, an additional amount of approximately $4,532,000 will need to be raised. Hence, if only debt finance and cash reserves are used, the capital structure cannot be maintained.”

I understood what they did. but I wanted to ask you that IF Persuit co was not planning to pay off the debt of Fodder co. we would still have considered the payment to Fodder co. as MV of firm (inclusive of its debt and equity)? Or we would have just taken MV of equity as payment to Fodder co. and used this to find our total need for funds?