A company that currently has no debt has an EBIT of Rp. 6 billion. The loan interest rate that applies to these companies is 8%. The company's current cost of equity is 10%. The applicable corporate interest rate for these companies is 20%.
a. What is the current firm market value?
b. if the company will increase the debt of Rp. 20 billion and using these funds to buy shares from shareholders (buy back), what is the value of the company?
c. what is the company's cost of equity after increasing debt and buying back shares from shareholders?
d. If by increasing debt, the company can increase the value of the company, why shouldn't management immediately try to increase debt as much as possible?

Answer rating: 100% (QA)

a To find the firm value we can use the following formula Firm Value EBIT Cost of Capital Growth Rate The cost of capital can be calculated as the wei... View the full answer