Reference no: EM13766669
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?
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