Question
5. Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8%. The company currently has no debt,
5. Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8%. The company currently has no debt, and its cost of equity is 13%. If the tax rate is 24%, what is the value of the firm? What will the value be if the company Borrows $195,000 and uses the proceeds to repurchase shares?
6. In Problem 5, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firms capital structure decision? Only answer question 6.
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
