Question
1) Meyer & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 8 percent. The company currently has no
1) Meyer & Co. expects its EBIT to be $83,000 every year
forever. The firm can borrow at 8 percent. The company currently has no debt, and
its cost of equity is 13 percent. If the tax rate is 35 percent, what is the value of the
firm? What will the value be if the company borrows $125,000 and uses the proceeds
to repurchase shares?
2) In Problem 1, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm's capital structure decision?
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Financial Institutions Management A Risk Management Approach
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
8th edition
978-0078034800, 78034809, 978-0071051590
