A firm has expected before-tax earnings of $20 per year forever, starting next year. The firm is
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A firm has expected before-tax earnings of $20 per year forever, starting next year. The firm is in the 25% tax bracket.
(a) If the firm is financed with half debt (risk-free, at 5% per year) and half equity (at 10% per year), and this is eternally maintained, then what is its NPV?
(b) If this firm took on $50 in debt and maintained its debt load at $50 forever (i.e., not the 50/50 debt/equity ratio), then what would this firm’s value be?
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