Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. The tax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares. You are required to answer the following: (a) What is the value of the unlevered firm?  (b) What will be the value of firm after recapitalization?  (c) What is the value of equity in the recapitalized firm?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm can
borrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. The
tax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares.

You are required to answer the following:
(a) What is the value of the unlevered firm? 
(b) What will be the value of firm after recapitalization? 
(c) What is the value of equity in the recapitalized firm? 
(d) What is the Weighted Cost of Capital of the levered firm?

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