Question
Your company keeps a constant debt-to-equity policy with a debt-to equity ratio of 2.4. The return on levered equity is 13.23%, the cost of debt
Your company keeps a constant debt-to-equity policy with a debt-to equity ratio of 2.4. The return on levered equity is 13.23%, the cost of debt is 6.50%, and the tax rate is 25%. The company has a perpetual after-tax unlevered cash flow of 450,000 EUR. Surprisingly the company announces that it is changing policy and states it will keep the debt perpetually at the same level (i.e. amount) it is now.
What is the new value of equity after the announcement? (Assume that the change in policy does not influence the unlevered return on equity and the cost of debt).
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