Question: Company A is an unlevered company with $2.5 million of EBIT, tax rate 34%, and a 10% required return on equity.
[A] Assume Company A is levered with $12 million of 7% bonds. Calculate the market value of the resulting levered Company B?
[B] Assume there is two companies, X and Y that are identical in all respects to the unlevered Company A & the levered Company B. The market value of A is $12,000,000 & the market value of B is $22,000,000. What is likely to happen as a consequence of these prices?