Cesar Digital Systems has EBIT of $500,000, a growth rate of 5%, and faces a tax rate of 40%. In order to support growth, Cesar must reinvest 50 percent of its EBIT in net operating assets. Cesar has $400,000 in 10% debt outstanding. A similar company with no debt has a cost of equity of 12%. (Note that this problem assumes growth in earnings, otherwise referred to as MM extension with growth.
What is the value of the firm’s tax shield? a. $228,571.43 b. $714,285.71 c. $285,714.29 d. None of the above
According to the MM extension with growth, what is the firm’s unlevered value? a. $228,571.43 b. $714,285.71 c. $285,714.29 d. None of the above