You are currently an investor in Bethesda mining that earns an EBIT of $ 10,000 each year. The firm's total assets are currently worth $ 80,000. 30% of the firm's assets are currently funded by debt at a cost of 8%. There are totally of 1000 shares outstanding of which you own 10 shares. In the recent board meeting, the executives have come up with the decision to push the firm's leverage to 45% by replacing a suitable amount of equity with debt. Suppose there are no taxes, the firm's WACC is 10%, and you can lend/borrow at 8%, prove that increasing leverage is a value-neutral proposition for you.

Answer rating: 100% (QA)

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