Question
Callaway Ltd expects to have an EBIT of $20 million in the coming year, and its EBIT is expected to grow at a rate of
Callaway Ltd expects to have an EBIT of $20 million in the coming year, and its EBIT is expected to grow at a rate of 2% after that. Callaway is currently an unlevered firm with a cost of capital of 4%. The corporate tax rate is 20%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $10 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Callaway if it decides to undertake the capital structure suggested by these financial experts?
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