a. Assume a firm with a value of $10,000 earns $1,000 EBIT. The tax rate is .35.
Question:
a. Assume a firm with a value of $10,000 earns $1,000 EBIT. The tax rate is .35. An investor owning 100 percent of the equity earns how much?
b. If the firm earning $1,000 EBIT is financed with .90 debt
($9,000) that pays .08 and .10 equity, the investor (who owns 100% of the equity) buys .65 of the debt. What return (in dollars)
does the investor earn?
c. Compare your answers to (3a.) and (3b.). What do you observe?
d. Recompute your answers to (3a.) and (3b.) if the firm earns
$2,000 EBIT.
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Related Book For 
Private Equity Transforming Public Stock To Create Value
ISBN: 9780471392927
1st Edition
Authors: Harold Bierman
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