Question
MacKinnon Co. currently has EBIT of $35,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate
MacKinnon Co. currently has EBIT of $35,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 20% of taxable income. The cost of equity for this firm is 18%.
Suppose the firm has a value of $155,555.56 when it is all equity financed. Now assume the firm issues $71,000 of debt paying interest of 8% per year and uses the proceeds to retire equity. The debt is expected to be permanent.
Value of the firm: 169755.56
value of the equity after the debt issue: 98755.56
Suppose that with the $71,000 of debt and no costs to financial distress the firm has a value of $169,755.56. Suppose, in addition:
1) The debt issue raises the possibility of bankruptcy.
2) The firm has a 11% chance of going bankrupt after 3 years.
3) If it goes bankrupt, it will incur bankruptcy costs of 110,000.
4) The discount rate is 18%.
What is the value of the firm? Enter your answer rounded to two decimal places.
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