Question: OConnell & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. OConnell currently has no debt, and

O’Connell & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. O’Connell currently has no debt, and its cost of equity is 12 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value be if the company borrows $125,000 and uses the proceeds to repurchase shares?

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