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The firm's EBIT is expected to remain constant at $2,600,000 per year in the future.

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Question

The firm's EBIT is expected to remain constant at $2,600,000 per year in the;future. All net income is paid out as dividends and the firm can borrow at a;constant 9% (regardless of the level of debt). If the firm sells debt, it uses its;proceeds to buy back ordinary shares, leaving the value of the firm's assets;constant. If no debts is used, the required return on equity is 13%.;a) Assume there are no taxes;I) What is the value of the firm?;ii) What will be the value of the firm's equity if it has $10,000,000 of debt?;b) Assume the firm has to pay corporate tax of 40% (everything else remain;unchanged);I) What is the value of the firm now if it has no debt?;ii) If the firm has $10,000,000 of debt, what will be its value and the;shareholders' equity?

 

Paper#76544 | Written in 18-Jul-2015

Price : $22
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