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What is the value of the company

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Reference no: EM132418414

Problem: HSU Corporation has an EBIT of $975,000 per year that is expected to continue in perpetuity.

The unlevered cost of equity for the company is 14% and the corporate tax rate is 35%.

The company also has a perpetual bond issue outstanding with a market value of $1.9 million.

Required:

Question 1: What is the value of the company if M&M propositions hold?

Question 2: The CFO of the company informs the company president that the value of company is $4.5 million. Is the CFO necessarily wrong? Explain using the tradeoff model.

Reference no: EM132418414

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