Question: OConnell & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7%, and has a tax rate of 35%.

OConnell & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7%, and has a tax rate of 35%. OConnell currently has no debt, and its cost of equity is 13%.

a. What is the value of the firm?

b. What will the value be if the company borrows $125,000 and uses the proceeds to repurchase shares?

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