Question
Value Co (Value) operates under the assumptions of Modigliani and Miller. Value currently has no debt, and its earnings are expected be $200,000 and can
Value Co (Value) operates under the assumptions of Modigliani and Miller. Value currently has no debt, and its earnings are expected be $200,000 and can range from a minimum of $100,000 to a maximum of $500,000. Value has 100,000 shares outstanding and its shares trade at $15 per share. (a) Howard is Values CFO and Howard argues that Value would be better off by borrowing $900,000 at 10% interest to repurchase Values shares at $15. If Value goes with Howards proposal, what is the change in Values ROE when Values earnings before interest is $100,000, $200,000, and $500,000 respectively
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