Fezziwig International (FI) has been in the haberdashery business since 1869. It is an all-equity firm. At the end of the current year, Mr. Fezziwig expects EBIT to be $1.6M and the same earnings are expected annually in perpetuity. The company is not growing so CAPEX and investments in net working capital are zero. The cost of equity for FI is 10%. An identical firm to FI, Skimpole Sewing (SS), has $5.5M of long-term debt outstanding. What is the value of SSs equity? The corporate tax rate is 38%. Assume that Modigliani & Miller assumptions hold.

Responses

a. $7.5M

b. $7.5M

c. $8.0M

d. $7.0M

e. $6.5M