George owns 100% of equity of a company. . If George works 6 hours per day, the company's EBIT will be 335,000 dollars per year, in perpetuity. If, instead, he works 12 hours per day, the firm's EBIT will be 430,000 dollars per year, in perpetuity.

The company is currently unlevered and it needs to raise $700,000 in external funds by issuing either debt or equity. The corporate tax rate is 21%, the unlevered cost of equity is 10%, and the pretax cost of borrowing is 6%.

1. What is the company's current value if George works 6 hours per day? What would it be if he works 12 hours per day?
2. Find the annual after-tax cash flow to Gerge if the funds are raised through equity and he is working 6 hours per day? Assume theres no change after the equity issue on EBIT. Also, find the annual after tax cash flow if he works 12 hours per day.
3. Now, find the annual after-tax cash flow to George if the funds are raised through debt and he works 6 hours per day? EBIT is the same after the debt issue. Also, find the annual after-tax cash flow if he works for 12 hours a day.

*Please be deatiled with the steps and make it clear.

Answer rating: 100% (QA)

To find the companys current value we need to calculate the unlevered value of the company and then consider the effects of leverage 1 Unlevered Value ... View the full answer