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There are two firms in the same business: New Co and Old Co. Both are in the same risk class and each has an EBIT
There are two firms in the same business: New Co and Old Co. Both are in the same risk class and each has an EBIT (Earnings Before Interest & Taxes) of $10 million. New Co has no debt and Old Co has $4 million of debt. The New Co cost of equity is 9% and the Old Co cost of debt is 5%. Assume a tax rate of 20%. 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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