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problem 5 ( 4 points ) ABC Corporation currently has a perpetual EBIT of $ 3 0 , 0 0 0 and is all -

problem5(4points)
ABC Corporation currently has a perpetual EBIT of $30,000 and is all-equity financed. The tax rate is 21% and the discount rate is 9%.
What is the value of the firm?
Now assume the firm issues $60,000 of debt paying interest of 8% per year, using the proceeds to retire equity. The debt is expected to be permanent. Assume also that the debt issue raises the probability of bankruptcy. If the company goes bankrupt, it will incur bankruptcy costs of $80,000 after 7 years. The discount rate is 9%. What is the value of the firm?
Should the firm issue debt under these conditions?
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