Use the following information to answer questions 18 - 19 Mayer & Co. expects its EBIT to...

50.1K

Verified Solution

Question

Finance

Use the following information to answer questions 18 -19
Mayer & Co. expects its EBIT to be $110,000 every yearforever. The firm can borrow at 10 percent. Meyer currently has nodebt, and its cost of equity is 22 percent. If the tax rate is 40percent, what is the value of the firm? (Do not round intermediatecalculations. Round your answer to 2 decimal places, e.g.,32.16.)
Value of the firm = $_
Hint: there is no Interest, so EBIT x (1-t) gives you NI. Sinceit is a perpetuity, NI/r gives you the value of the firm.
What will the value be if the company borrows $290,000 and usesthe proceeds to repurchase shares? (Do not round intermediatecalculations. Round your answer to 2 decimal places, e.g.,32.16.)
Value of the firm = $
Hint: This is a Miller Modigliani question with tax. Take theall-equity value of the firm from the previous question and add toit the value of the perpetual debt tax shield equal to the tax ratetimes the value of the Debt.

Answer & Explanation Solved by verified expert

3.9 Ratings (412 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Use the following information to answer questions 18 -19Mayer & Co. expects its EBIT to be $110,000 every yearforever. The firm can borrow at 10 percent. Meyer currently has nodebt, and its cost of equity is 22 percent. If the tax rate is 40percent, what is the value of the firm? (Do not round intermediatecalculations. Round your answer to 2 decimal places, e.g.,32.16.)Value of the firm = $_______Hint: there is no Interest, so EBIT x (1-t) gives you NI. Sinceit is a perpetuity, NI/r gives you the value of the firm.What will the value be if the company borrows $290,000 and usesthe proceeds to repurchase shares? (Do not round intermediatecalculations. Round your answer to 2 decimal places, e.g.,32.16.)Value of the firm = $______Hint: This is a Miller Modigliani question with tax. Take theall-equity value of the firm from the previous question and add toit the value of the perpetual debt tax shield equal to the tax ratetimes the value of the Debt.