Question: Elmo Enterprises is a no-growth company whose EBIT is expected to remain constant at $2,600,000 per year in the future. All net income is paid

Elmo Enterprises is a no-growth company whose EBIT is expected to remain constant at $2,600,000 per year in the future. All net income is paid out as dividends and Elmo can borrow at a constant kd 9% (i.e. regardless of the level of debt). If the firm sells debt, it uses all the proceeds to buy back ordinary shares, leaving the value of the firms assets constant. If no debt is used, the required return on equity is ks 13% . Unless otherwise stated, in what follows the assumptions of the original Modigliani-Miller model (1958) hold. (a) Firstly assume there are no taxes. (i) What is the value of the firm? (ii) What will be the value of the firms equity if it has $10,000,000 of debt?

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