Question
Forward Forwarding Company Limited expects an Earnings Before Interest and Tax (EBIT) of $30,000 every year forever. The company currently has no debt, and its
Forward Forwarding Company Limited expects an Earnings Before Interest and Tax (EBIT) of $30,000 every year forever. The company currently has no debt, and its cost of equity is 11%. Suppose the corporate tax rate is 22%.
(a) Compute the current value of the company. (5 marks)
(b) Suppose the company can borrow at 6%. What will the value of the company be if the company takes on debt equal to 50% of its unlevered value? (5 marks)
(c) If, instead, the company plans to take on debt equal to 50% of its levered value, calculate its value. (5 marks)
(d) Is there an easily identifiable debt-equity ratio that will maximize the value of a company? Explain. (4 marks)
(e) Are certain types of industries more likely to be highly leveraged than others? Discuss and explain. (6 marks)
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