A company expects an EBIT of $94,500 every year forever. The company currently has no debt and its cost of equity is 11%. The corporate tax rate is 25%. Suppose the company can borrow at 6.5% and use the debt proceeds to repurchase shares. What will the value of the firm be if the company recapitalizes and takes on debt equal to 30% of its unlevered value?
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
A company expects an EBIT of $94,500 every year forever. The company currently has no debt and its
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