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As before, your firm currently has an EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm
As before, your firm currently has an EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 35% of taxable income. The discount rate for the firm's projects is 10%. Now assume the firm issues $50,000 of debt paying interest (cost of debt) of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What is the new total value of the firm (debt plus equity)?
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