down restaurant that specializes in home-cooked meals. Theresa’s is a walk-in deli that specializes in speciality soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped doughnuts, sandwiches, and wraps at a local beach. Phil’s currently has a WACC of 14% while Theresa’s WACC is 10%. The expansion project has a projected net present value of £12,600 at a 10% discount rate and a net present value of -£2,080 at a 14% discount rate.  Theresa’s belongs to Harvester, which has expected earnings before interest and tax  (EBIT) of £45,000 in perpetuity and a tax rate of 30%. Harvester has £60,000 in outstanding  debt at an interest rate of 8%. The unlevered cost of capital is 12.   1. What is the value of Harvester according to Modigliani and Miller Proposition I with taxes? 2. Should Harvester change its debt-equity ratio if the goa

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
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Phil’s is a sit-down restaurant that specializes in home-cooked meals. Theresa’s is a walk-in deli that specializes in speciality soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped doughnuts, sandwiches, and wraps at a local beach. Phil’s currently has a WACC of 14% while Theresa’s WACC is 10%.

The expansion project has a projected net present value of £12,600 at a 10% discount rate and a net present value of -£2,080 at a 14% discount rate. 

Theresa’s belongs to Harvester, which has expected earnings before interest and tax 
(EBIT) of £45,000 in perpetuity and a tax rate of 30%. Harvester has £60,000 in outstanding 
debt at an interest rate of 8%. The unlevered cost of capital is 12.

 

1. What is the value of Harvester according to Modigliani and Miller Proposition I with taxes?

2. Should Harvester change its debt-equity ratio if the goal is to maximize the value of the 
firm? Why?

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Knowledge Booster
Break-even Analysis
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education