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Hanson currently has EBIT of $250,000 and is all-equity financed. EBIT is expected to stay...

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Finance

  1. Hanson currently has EBIT of $250,000 and is all-equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 35% of taxable income. The discount rate for the firm's projects is 10%.
  1. What is the market value of the firm?
  1. Now assume the firm issues $500,000 of debt that pays interest of 6% per year and uses the proceeds to retire equity. The debt is expected to be permanent. However, the debt raises the possibility of bankruptcy. The firm has a 30% chance of going bankrupt after 3 years. If it does go bankrupt, it will incur bankruptcy cost of $2,000,000. The discount rate is 10%. Should the firm issue the debt?

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