The managers of an all-equity firm are interested in borrowing $1.2 million and using the proceeds torepurchase shares of stock. The firm's investment banker estimates that an appropriate interest rateon the debt is 5%. The firm's current cost of equity is 13% and its tax rate is 21%. Also, the companyis expected to generate EBIT of $700,000 in perpetuity. If the managers pursue the capitalrestructuring plan, then what will be the value of the levered equity?$3,305,846.15O $4,253,846.15O $4,436,615.38O $4,505.846.15O $3,053,846.15

Value of unlevered firm = EBIT-*(1-Taxes)/ Cost of equity= $700,000*(1-21%)/13%= $4,253,846.154

Answered: The managers of an all-equity firm are…

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

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