Business, 28.07.2020 19:01 nakedkats7656

Trade-off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 35 percent of taxable income. The discount rate for the firm"s projects is 10 percent. a. What is the market value of the firm?
b. Now assume the firm issues $50,000 of debt paying interest of 6 percent per year and uses the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)?

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Trade-off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT i...