Question
A firm with no debt expects to generate pretax net operating profit of $100,000 per year in perpetuity. The required return on assets for this
A firm with no debt expects to generate pretax net operating profit of $100,000 per year in perpetuity. The required return on assets for this firm is 10%, and it faces a corporate tax of 21%.
Suppose the firm borrows $500,000 and uses the proceeds to buy back an equivalent amount of stock.
What is the firm value now?
Hint: use a firm value formula for levered firms.
| a. | $895,000 | |
| b. | $1,350,000 | |
| c. | $790,000 | |
| d. | $1,250,000 |
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Free Dollar For College For Dummies
Authors: David Rosen, Caryn Mladen
1st Edition
0764554670, 978-0764554674
