Firm B has an expected EBIT of £40,000 in perpetuity and a tax rate of 28 per cent. The firm has £50,000 in outstanding debt at an interest rate of 6 per cent, and its unlevered cost of capital is 12 per cent.
Required:
(i) What is the value of the firm according to Modigliani and Miller (M&M) Proposition I with taxes?
(ii) Should firm B change its debt–equity ratio if the goal is to maximize the value of the firm? Explain.

Answer rating: 100% (QA)

i Value of levered firm EBIT1TaxCost of capital Tax rateDebt 40... View the full answer