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M&M Proposition and Debt-Equity Ration

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A company has an expected EBIT of $45,000 in perpetuity and a tax rate of 35%. The firm has $80,000 in outstanding debt at an interest rate of 9% with an unleveled cost of capital of 14%. What is the value of the firm according to M&M proposition 1 with taxes? Should they change their debt-equity ration if the goal is to maximize the value of the firm? Why or why not?

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Solution Summary

The solution examines the M&M proposition 1 with taxes. Whether the firm should change their debt-equity rations if the goal is to maimize the value of the firm is determined.

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ANSWERS
Value of the levered firm is he value of the unlevered firm plus the present value of the tax ...

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