NEED HELP WITH LAST PART (Number 3)

1. MacKinnon Co. currently has EBIT of $45,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 29% of taxable income. The cost of equity for this firm is 16%.

What is the market value of the firm? ANS: 199,687.5

2. Suppose the firm has a value of $199,687.5 when it is all equity financed. Now assume the firm issues $51,000 of debt paying interest of 8% per year and uses the proceeds to retire equity. The debt is expected to be permanent.

What will be the value of the firm? ANS: 214,477.5

What will be the value of the equity after the debt issue? ANS: 163,477.5

3. Suppose that with the $51,000 of debt and no costs to financial distress the firm has a value of $214,477.5. Suppose, in addition:

- The debt issue raises the possibility of bankruptcy.

- The firm has a 20% chance of going bankrupt after 2 years.

- If it goes bankrupt, it will incur bankruptcy costs of 50,000.

- The discount rate is 16%.

What is the value of the firm?