I would like to know the methods to how these answers are generated

University Center Co. currently has EBIT of $41,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The cost of equity for this firm is 14%.

a) What is the market value of the firm?

• Answer is $231,357.14

Suppose the firm has a value of $231,357.14 when it is all equity financed. Now assume the firm issues $42,000 of debt paying interest of 5% per year and uses the proceeds to retire equity. The debt is expected to be permanent.

b) What will be the value of the firm?

• Answer is $240,177.14

c) What will be the value of the equity after the debt issue?

• Answer is $198,177.14

Suppose that with the $42,000of debtthe firm has a value of $240,177.14 and a value of equity of $198,177.14.

d) What will be the expected rate of return on the equity?

• Answer is 15.51%