Massey-Moss Corporation has a perpetual EBIT of $3 million and a 40% tax rate. Let’s assume...

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Massey-Moss Corporation has a perpetual EBIT of $3 million and a40% tax rate. Let’s assume that depreciation expense is zero. It isable to borrow at an interest rate of 14%, whereas its requiredrate of return on equity in the absence of borrowing is 18%.
a. In the absence of personal taxes, what is the value of the firmwhen it has no debt? When it has $4 million in debt?
b. If the marginal personal tax rates on stock and bond income are25% and 30%, respectively, determine the value of the firm when ithas no debt and when it has $4 million in debt.

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4.4 Ratings (833 Votes)

The Data given areEBIT3 millionTc corporate tax40040rD rate of interest in presence of borrowing 14014 r0 rate of intereset in the absence ofborrowing See Answer

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Massey-Moss Corporation has a perpetual EBIT of $3 million and a40% tax rate. Let’s assume that depreciation expense is zero. It isable to borrow at an interest rate of 14%, whereas its requiredrate of return on equity in the absence of borrowing is 18%.a. In the absence of personal taxes, what is the value of the firmwhen it has no debt? When it has $4 million in debt?b. If the marginal personal tax rates on stock and bond income are25% and 30%, respectively, determine the value of the firm when ithas no debt and when it has $4 million in debt.