Question
You are currently an investor in ABC Company that earns an EBIT of $ 10,000 each year. The firms total assets are currently worth $
You are currently an investor in ABC Company that earns an EBIT of $ 10,000 each year. The firms total assets are currently worth $ 80,000. 30% of the firms assets are currently funded by debt at a cost of 8%. There are totally 1000 shares outstanding of which you own 10 shares. In the recent board meeting, the executives have come up with the decision to push the firms leverage to 45% by replacing suitable amount of equity with debt. Suppose there are no taxes, the firms WACC is 10%, and you can lend/borrow at 8%, prove that increasing leverage is a value neutral proposition for you.
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