Business, 09.06.2020 18:57 aiyanaxmartinez

Trade-Off Theory. Smoke and Mirrors currently has EBIT of $25,000 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%.(LO3) a. What is the market value of the firm?

b. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)?

c. Recompute your answer to (b) under the following assumptions: The debt issue raises the probability of bankruptcy. The firm has a 30% chance of going bankrupt after 3 years. If it does go bankrupt, it will incur bankruptcy costs of $200,000. The discount rate is 10%. Should the firm issue the debt?

Answers: 1

Show answers

Another question on Business

Business, 21.06.2019 18:50

You are the manager of a firm that produces output in two plants. the demand for your firm's product is p = 20 − q, where q = q1 + q2. the marginal costs associated with producing in the two plants are mc1 = 2 and mc2 = 2q2. how much output should be produced in plant 1 in order to maximize profits?

Answers: 3

Answer

Business, 22.06.2019 09:40

Alpha industries is considering a project with an initial cost of $8 million. the project will produce cash inflows of $1.49 million per year for 8 years. the project has the same risk as the firm. the firm has a pretax cost of debt of 5.61 percent and a cost of equity of 11.27 percent. the debt–equity ratio is .60 and the tax rate is 35 percent. what is the net present value of the project?

Answers: 1

Answer

Business, 22.06.2019 17:00

Afinancing project has an initial cash inflow of $42,000 and cash flows of −$15,600, −$22,200, and −$18,000 for years 1 to 3, respectively. the required rate of return is 13 percent. what is the internal rate of return? should the project be accepted?

Answers: 1

Answer

Business, 23.06.2019 00:30

How much of your paycheck do you have immediate access to once you deposit it into your bank account a. all of it b. a portion of it c. none of it

Answers: 1

Answer

You know the right answer?

Trade-Off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity- financed. EBIT...

Questions