Compute the change in the value of your firm

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Question - Your company currently has an equity beta of 1.2, risk-free debt, and a constant D/E ratio of 0.20. Your firm is also expected to achieve a FCF of $20M in one year's time, with FCFs expected to grow at a 4% rate forever. The expected return on the market is 6%, the risk-free rate is 1%, and the corporate tax rate is 30%. You are debating increasing your D/E ratio to 0.80. If you do so, your debt will have a beta of 0.10. Compute the change in the value of your firm if you increase your D/E ratio from 0.20 to 0.80.

Reference no: EM133185896

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