Determine what will the value of the firm be

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Problem 1: New Schools expects an EBIT of $87,000 every year, forever. The firm currently has no debt, and its cost of equity is 14.6 percent. The firm can borrow at 7.4 percent, and the corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50 percent debt?

A. $460,146.57

B. $381,796.47

C. $377,407.16

D. $437,552.08

Problem 2: Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 175,000 shares of stock outstanding. Under Plan II, there would be 90,000 shares of stock outstanding and $1.4 million in debt. The interest rate on the debt is 7 percent, and there are no taxes. What's the break-even EBIT?

A. $201,764.71

B. $341,414.14

C. $351,111.11

D. $287,878.78

Reference no: EM132759216

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