Question
Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 9 percent. It is considering substituting
Compton Corporation currently has no debt in its capital structure. As an unlevered firm, its cost of equity is 9 percent. It is considering substituting $40,000 in debt at 4 percent interest. The EBIT for the firm is $15,000 under either scenario, and the tax rate is 35 percent. According to M&M with taxes, how much value will be added to the firm by substituting $40,000 in debt?
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Cost Benefit Analysis
Authors: Harry F. Campbell, Richard P.C. Brown
3rd Edition
1032320753, 9781032320755
