What is the decrease in the firm value

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Question - A Inc. has EBIT of $70m in perpetuity. The cost of capital of unlevered firm is 10%. Its corporate tax rate is 30%.

(i)  If A is financed with 100% equity, what are A's (a) firm value; (b) equity value?

(ii) If A is financed with $120m debt, and the rest with equity, what are (a) A's firm value; (b) equity value? Assuming costs of financial distress can be ignored.

(iii)  If A is financed with $120m debt, and the rest with equity, and the current market values for debt and equity are $120m and $360m, respectively. If costs of financial distress cannot be ignored, what is the decrease in the firm's value due to expected financial distress costs?

Reference no: EM132928966

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