Redmond Diagnostic Laboratory is a no growth company with current and expected future Earnings Before...
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| Redmond Diagnostic Laboratory is a no growth company with current and expected future Earnings Before Interest and Taxes of $400,000. Redmond currently uses no debt financing, but is considering adding $1,000,000 of debt financing at a cost of 6.5%. Redmond's current tax rate is 25% and unleveraged companies in the same risk class have a cost of equity of 12%. | ||||||||||
| a). | What is Redmond Diagnositc Laboratory's current value? (3) | |||||||||
| b). | Now assume that Redmond changes its capital structure and adds $1,000,000 debt: | |||||||||
| i). | What is Redmond's value using the 1958 Modigliani and Miller model without taxes? (2) | |||||||||
| ii). | What is Redmond's value using the 1963 Modigliani and Miller model with corporate taxes? (3) | |||||||||
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