Expected to continue in perpetuity

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Reference no: EM131611719

Janetta Corp has an EBIT of $985,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 13 percent, and the corporate tax rate is 34 percent. The company is considering a perpetual bond issue outstanding with a market value of $1.9 million. The cost of debt is 10 percent.

a. Compute the total cash flow to investors with (1) no bond issued (2) bond issued.

b. Compute the value of the firm with (1) no bond issued (2) bond issued.

Reference no: EM131611719

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