Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. The tax rate is 24 percent. 1. What is the value of the firm? 2. What is the value if the company borrows $195,000 and uses the proceeds to repurchase shares? 3. What is the cost of equity after recapitalization?
Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. The tax rate is 24 percent. 1. What is the value of the firm? 2. What is the value if the company borrows $195,000 and uses the proceeds to repurchase shares? 3. What is the cost of equity after recapitalization?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter17: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 8P
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Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its
24 percent.
1. What is the value of the firm?
2. What is the value if the company borrows $195,000 and uses the proceeds to repurchase
shares?
3. What is the cost of equity after recapitalization?
4. What is the WACC?
5. What are the implications of the firm’s decision to borrow?
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