Question: Tool Manufacturing has an expected EBIT of 24 000 in perpetuity
Tool Manufacturing has an expected EBIT of $24,000 in perpetuity and a tax rate of 35 percent. The firm has $65,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 13 percent. What is the value of the firm according to MM Proposition I with taxes? Should Tool change its debt-equity ratio if the goal is to maximize the value of the firm? Explain.
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