East Corp is a mature company and expects its sales and operating costs to be fixed (or unchanged) in perpetuity. It has sales of $524,000 and operating costs of $272,480. The firm has a tax rate of 16%, an unleavered cost of capital of 10.83%, and $258,000 in outstanding debt at an interest rate of 3.25%. What is the value of the firm according to M&M Proposition I with taxes? Given its current capital structure, what is the cost of equity capital? Should the company change its capital structure if it wants to maximize the value of the firm? How should it do this? If it did this, what would the new value of the firm be?

Answer rating: 100% (QA)

SOLUTION MM Proposition I with taxes states that the value of a firm is equal to the value of its unlevered firm plus the present value of the tax shield from debt The formula for the value of the lev... View the full answer