Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level Indefinitely. The firm pays corporate
Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this level Indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The discount rate for the firm's projects is 10%. a. What is the market value of the firm? (Do not round Intermediate calculations.) b. Now assume the firm Issues $50,000 of debt paying Interest of 6% per year, using the proceeds to retire equilty. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)? C. Now assume the firm issues $50,000 of debt paying Interest of 6% per year, using the proceeds to retire equity. The debt issue raises the probability of bankruptcy. The firm has a 30% chance of going bankrupt after 3 years. If it does go bankrupt, It will incur bankruptcy costs of $200,000. The discount rate is 10%. What is the cost of bankruptcy and what is Its present value? (Do not round Intermediate calculations. Round your answers to the nearest whole dollar.) d. Should the firm issue the debt under these new assumptions? b. C. Market value The value of the firm will by Cost of bankruptcy Present value of cost of bankruptcy Should the firm issue the debt under these new assumptions? d
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started