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There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class and each has an EBIT
There are two firms in the same business: Air Wolf and Red Wolf. Both are in the same risk class and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. Air Wolf has no debt and Red Wolf has $4 million of debt. The cost of equity is 8% and the cost of debt is 10%. Assume a tax rate of 30%. Calculate the:
(a) total value of each firm and
(b) the break-down of value or capital structure in terms of its components (debt & equity).
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