You are currently an investor in Bethes mining that earns an EBIT of $ 10,000 each year.
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You are currently an investor in Bethes mining 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.
Related Book For
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
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