Compute the value of the firm

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Reference no: EM13295190

Your firm has $2,000,000 as perpetual EBIT. Currently the firm is all equity financed and there are 1,000,000 shares outstanding. The required rate of shareholders is currently 10 percent and the corporate tax rate is 30 percent. Suppose that the firm issues $2,000,000 of perpetual debt at an interest rate of 6 percent and uses the proceeds to buy back outstanding shares. The required rate of return of shareholders at this level of debt is 11 percent. Compute (i) the value of the firm, (ii) the price per share, and (iii) the number of shares outstanding after the capital structure change.

Reference no: EM13295190

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