Firm Value:
Old School Corporation expects an EBIT of $9,000 every year forever. Old School currently has no debt, and its cost of equity is 18 percent. The firm can borrow at 11 percent. The corporate tax rate is 35 percent.
Required:
a. What is the value of the firm? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Value of the firm $_________
b. What will the value be if Old School converts to 50 percent debt and 100 percent debt? (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
Value of the firm
50 percent $______
100 percent $______