# Question: Young Corporation expects an EBIT of 19 750 every year forever

Young 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 percent. If the corporate tax rate is 35 percent, what will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? What if it takes on debt equal to 100 percent of its unlevered value?

c. What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value? What if the company takes on debt equal to 100 percent of its levered value?

a. What is the current value of the company?

b. Suppose the company can borrow at 10 percent. If the corporate tax rate is 35 percent, what will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? What if it takes on debt equal to 100 percent of its unlevered value?

c. What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value? What if the company takes on debt equal to 100 percent of its levered value?

## Answer to relevant Questions

Repeat parts (a) and (b) in Problem 1 assuming Beckett has a tax rate of 35 percent. In problem a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the ...In a world of corporate taxes only, show that the RWACC can be written as RWACC = R0 × [1 – tC ( B/V)]. Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers? In problem a. Ignoring taxes, compare both of these plans to an all-equity plan ...Suppose the president of the company in the previous problem stated that the company should increase the amount of debt in its capital structure because of the tax-advantaged status of its interest payments. His argument is ...As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of ...Post your question