Question: Answer Bold Questions 1. a) Key Lime Pie Co. expects EBIT of $100,000 every year forever. Key Lime Pie Co. currently has no debt and

Answer Bold Questions

1. a)

Key Lime Pie Co. expects EBIT of $100,000 every year forever. Key Lime Pie Co. currently has no debt and its cost of equity is 19%. The firm can borrow at 7%. The corporate tax rate is 21%.

What is the value of the firm? Enter your answer rounded to two decimal places. 415,789.47

Given that the firm has a value of $415,789.47 when it is all equity, what will be the value of the firm if Key Lime Pie Co. borrows $220,000 of permanent debt and uses the proceeds to buy back stock? Enter your answer rounded to two decimal places. 461,989.47

Given that the firm has a value of $415,789.47 when it is all equity, how can Key Lime Pie Co. maximize the value of the firm? What will be the maximum value if there are no costs to financial distress? Enter your answer rounded to two decimal places.

University Center Co. currently has EBIT of $50,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 33% of taxable income. The cost of equity for this firm is 15%.

What is the market value of the firm? Enter your answer rounded to two decimal places.

223,333.33

Suppose the firm has a value of $223,333.33 when it is all equity financed. Now assume the firm issues $83,000 of debt paying interest of 8% per year and uses the proceeds to retire equity. The debt is expected to be permanent.

What will be the value of the firm? Enter your answer rounded to two decimal places.

250,723.33

What will be the value of the equity after the debt issue? Enter your answer rounded to two decimal places.

167,723.33

Suppose that with the $83,000 of debt the firm has a value of $250,723.33 and a value of equity of $167,723.33. What will be the expected rate of return on the equity?

Enter your answer as a percentage rounded to two decimal places. Do not include the percentage sign as part of your answer.

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