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.
Answer to relevant QuestionsYoung Corporation expects an EBIT of $19,750 every year forever. The company currently has no debt, and its cost of equity is 15 percent. a. What is the current value of the company? b. Suppose the company can borrow at 10 ...Williamson, Inc., has a debt-to-equity ratio of 2.2. The firm’s weighted average cost of capital is 10 percent, and its pretax cost of debt is 6 percent. Williamson is subject to a corporate tax rate of 35 percent. a. What ...Sanborn Corp. is comparing two different capital structures. Plan I would result in 2,300 shares of stock and $22,560 in debt. Plan II would result in 1,400 shares of stock and $47,940 in debt. The interest rate on the debt ...Dragula, Inc., has debt outstanding with a face value of $3.8 million. The value of the firm if it were entirely financed by equity would be $12.3 million. The company also has 245,000 shares of stock outstanding that sell ...The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.5 percent. Suppose ...
Post your question