Baker Corporation expects an EBIT of $43,000 every year forever. Baker currently has no debt, and its

Question:

Baker Corporation expects an EBIT of $43,000 every year forever. Baker currently has no debt, and its cost of equity is 13 percent. The company can borrow at 8 percent. If the corporate tax rate is 38 percent, what is the value of the firm? What will the value be if the company converts to 50 percent debt? To 75 percent debt? To 100 percent debt? What does this tell you about the relationship between the debt-equity ratio and the value of the interest tax shield?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...