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12-2 An unlevered company operates in perfect markets and has earnings before interest and taxes (EBIT) of $2,000,000. Assume that the required return on assets
12-2 An unlevered company operates in perfect markets and has earnings before interest and taxes (EBIT) of $2,000,000. Assume that the required return on assets for firms in this industry is 8%. The firm issues $10 million worth of debt, with a required return of 6.5%, and uses the proceeds to repurchase outstanding stock. There are no corporate or personal taxes.
a. What is the market value and required return of this firm
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