QC Corporation expects an EBIT of $7,500 every year forever. Because it has no depreciable assets,...

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QC Corporation expects an EBIT of $7,500 every year forever. Because it has no depreciable assets, this is also equivalent to its operating cash flows. QC currently has no debt, giving it an equity beta of 1.4. The firm could borrow at 9.6%, with a debt beta of .2, but this would increase the equity beta to 1.9. There are no corporate income taxes, the risk-free rate is 6%, the return on the market portfolio is 10%. a. What is the current value of the unlevered firm? b. What is the value of the firm if it changes its capital structure to include 50% debt. QC Corporation expects an EBIT of $7,500 every year forever. Because it has no depreciable assets, this is also equivalent to its operating cash flows. QC currently has no debt, giving it an equity beta of 1.4. The firm could borrow at 9.6%, with a debt beta of .2, but this would increase the equity beta to 1.9. There are no corporate income taxes, the risk-free rate is 6%, the return on the market portfolio is 10%. a. What is the current value of the unlevered firm? b. What is the value of the firm if it changes its capital structure to include 50% debt.

Answer rating: 100% (QA)

To solve this problem we need to use the ModiglianiMiller MM theorem with no taxes Given information ... View the full answer