Production: Iolaus, a friend of Hercules and Xena, has retired from fighting evil and opened...
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Production: Iolaus, a friend of Hercules and Xena, has retired from fighting evil and opened a sandal shop called Hermes' Sandals. Total profits from the sale of sandals is expected to equal 5,000 drachmas next year. These profits have a beta of 1.2 and are expected to grow at a rate of 2% per year. Financial Policy: Iolaus has financed the firm by floating 20,000 drachmas worth of perpetual debt in period 0 . Iolaus adjusts the firm's total outstanding debt every other year in order to restore the debtequity ratio back to what it is in year 0 . Assume the debt has a beta of 0.1 . Taxes: The Athenian government imposes a tax of 40% on a firm's operating profits (revenues minus costs minus any interest paid) each year. lolaus being an honest sole always pays what he owes. Market Statistics: The expected return on the market equals 15%, and the risk free rate equals 5%. Question: How much is the equity in Hermes' Sandals worth
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