Pinnacle Corporation expects an EBIT of $19,750 every year in perpetuity. Currently the company has no debt on their books and its cost of equity is 15%. Pinnacle can borrow at a rate of 10%. If the corporate tax rate is 35%, what is the value of the firm? What will the value be if the company converts to 50% debt? To 100% debt?

Pinnacle Corporation expects an EBIT of $19,750 every year in perpetuity. Currently the company has no debt on their books and its cost of equity is 15%. Pinnacle can borrow at a rate of 10%. If the corporate tax rate is 35%, what is the value of the firm? What will the value be if the company converts to 50% debt? To 100% debt?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section2.A: Taxes

Problem 5P

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