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Firm Value of Old School Corporation

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Old School Corp. expects an EBIT of $9,000 every year forever. Old School currently has no debt,and it's cost of equity is 17 %. The firm can borrow at 10 %. If the corporate tax rate is 35 %, what is the value of the firm? What will be the value if Old School converts to 50 % debt? To 100 % debt?

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Solution Summary

This solution calculates the current value of a firm and a future value given particular changes.

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a)
The firm is currently unlevered.
EBIT = $9000 per year
Interest = 0
Tax = 0.35*9000=3150
EAT = ...

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