1. 16.

M&M [LO 16.2] Marayong Manufacturing has an expected EBIT of

$51 000 in perpetuity and a tax rate of 30 per cent. The firm has $126 000 in outstanding debt at an interest rate of 5.35 per cent, and its unlevered cost of capital is 9.6 per cent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt-to-equity ratio if the goal is to maximise the value of the firm? Explain.