Question: Air Seattle has an annual EBIT of 1 000 000 and the
Air Seattle has an annual EBIT of $1,000,000, and the WACC in the unlevered firm is 20%. The current tax rate is 35%. Air Seattle will have the same EBIT forever. If the company sells debt for $2,500,000 with a cost of debt of 20%, what is the value of equity in the unlevered and levered firm? What is the value of debt in the levered firm? What is the government’s value in the unlevered and levered firm?
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