Question: Bruce & Co. expects its EBIT to be 110,000 every year forever. The firm can borrow at 10 per cent. Bruce currently has no debt,

Bruce & Co. expects its EBIT to be 110,000 every year forever. The firm can borrow at 10 per cent. Bruce currently has no debt, and its cost of equity is 20 per cent.

(a) If the tax rate is 21 per cent what is the value of the firm?

(b) What will the value be if Bruce borrows 80,000 and uses the proceeds to repurchase shares?

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