Frederick & Co. expects its EBIT to be $100,000 every year forever. The firm can

Question

Frederick & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 23 percent. If the tax rate is 32 percent, the value of the firm is ___________. The value will be _________if Frederick borrows $63,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Please show how you get your work!

Thanks So Much,

Frederick & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 23 percent. If the tax rate is 32 percent, the value of the firm is ___________. The value will be _________if Frederick borrows $63,000 and uses the proceeds to repurchase shares. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Please show how you get your work!

Thanks So Much,

Explanation / Answer

income after tax = 10000(0.23) =23000
cost of equity = 23000*0.15 = 3450
value of firm = 19550

if fredrick borrows money
then cost of debt =63000*1.09 =5670
there will be no cost of equity
income b4 tax = 19550- 5670 =13880

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