Question: Question 1 (M&M, Case II, Proposition 1) Allocated Mark = 7 marks Rahman Co. has an expected EBIT of $120,000 in perpetuity and tax rate

"Question 1" (M&M, Case II, Proposition 1) "Allocated Mark = 7

"Question 1" (M&M, Case II, Proposition 1) "Allocated Mark = 7 marks Rahman Co. has an expected EBIT of $120,000 in perpetuity and tax rate of 40%. The firm is paying 8.75% interest for $210,000 outstanding amount of debt. Unlevered cost of capital is 11.75%. a. Evaluate the firm using Modigliani and Miller approach (Case (11), Proposition (1) with taxes)? (4 marks) b. Find the equity value and D/E ratio? (1 mark) c. Under the Modigliani and Miller approach (Case II, Proposition I with taxes), explain how the firm can increase its value using the financial leverage? And explain the reason behind that? (2 marks)

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