Cavo Corporation expects an EBIT of $22,500 every year forever. The company currently has no debt, and its cost of equity is 12 percent.
a. What is the current value of the company?
b-1 Suppose the company can borrow at 7 percent. The corporate tax rate is 35 percent. What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value?
b-2 Suppose the company can borrow at 7 percent. The corporate tax rate is 35 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?
c-1 What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value?
c-2 What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?