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The EBIT of a firm is INR 15 crores. The firm is currently all equity financed at a cost of equity capital of 15%. The
The EBIT of a firm is INR 15 crores. The firm is currently all equity financed at a cost of
equity capital of 15%. The firm intends to lever up and change its capital structure by
taking on debt of INR 50 crores in perpetuity as it provides
some value add to the firm. If the prevailing tax rate is 20%, what is the value of this firm
before and after the change in capital structure? The firm is currently efficiently run and the
shareholders are happy with the current earnings and do not intend to change the earnings
in the future.
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