EBIT is perpetual and Modigliani-Miller world with taxes

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Reference no: EM132028950

BB.co is a construction company that at the moment was fully financed with assets. The new manager suggests that shareholders include debt in their financial structure as this increases the value of the company. The company has an EBIT of $100 each year. Their equity is valued (that is, the price of their shares) so that their expected return is 10% and the corporate tax rate is 20%. The company can indebt at the risk-free rate, 4%. Suppose the EBIT is perpetual and a Modigliani-Miller world with taxes. How much would the value of the company increase if BB.co is indebted permanently so that its debt represents 50% of the value of the assets of the company?

Reference no: EM132028950

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