QUESTION 1

PART 1

Frederick & Co. expects its EBIT to be $85,000 every year forever. The firm can borrow at 11 percent. Frederick currently has no debt, and its cost of equity is 20 percent. If the tax rate is 35 percent, the value of the firm is $ ... . The value will be $.... if Frederick borrows $57,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

PART 2

Tool Manufacturing has an expected EBIT of $38,000 in perpetuity, and a tax rate of 31 percent. The firm has $60,000 in outstanding debt at an interest rate of 11 percent, and its unlevered cost of capital is 15 percent. The value of the firm is $ according to M&M Proposition I with taxes. (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))