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Joe Schmoe & Co expects its dividends to be $85,000 every other year forever, with the first payment occurring two years from today. The firm
Joe Schmoe & Co expects its dividends to be $85,000 every other year forever, with the first payment occurring two years from today. The firm can borrow at an EAR of 11%, currently has no debt, and has an effective annual cost of equity of 18%. The corporate tax rate is 35%. Assume tax credits for losses and no financial distress costs. (a) Calculate the value of the firm. (b) What will firm value be if it borrows $60,000 in permanent debt with annual coupon payments and uses the proceeds to repurchase its shares?
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