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Question 3: (25 marks) Pinnacle Corporation expects an EBIT of $19,750 every year in perpetuity. Currently the company has no debt on their books and
Question 3: (25 marks)
Pinnacle Corporation expects an EBIT of $19,750 every year in perpetuity. Currently the company has no debt on their books and its cost of equity is 15%. Pinnacle can borrow at a rate of 10%. If the corporate tax rate is 35%, what is the value of the firm? What will the value be if the company converts to 50% debt? To 100% debt?
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