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Calculate the value of the unlevered company VU

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Reference no: EM133091048

Question - Your company is entirely financed by equity. It expects to generate €75,000 of cash inflows per annum before tax in perpetuity. It works in a sector where shareholders require a return on equity RE of 18% (in the absence of debt) and the tax rate is 28%. The company distributes all its earnings as dividends.

Indicate the return on assets RA suggested by the current all-equity situation. Your company is considering issuing debt.

Calculate the value of the unlevered company VU.

Explain the two principal theories of M&M in relation to the impact of the issuance of debt.

Reference no: EM133091048

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