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    M&M with Corporate Taxes

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    Sci-fi is originally all equity financed (unlevered). All earnings are paid out as dividends, and the growth rate is zero. The firm decides to issue $8,000,000 in debt at 6% and to use the proceeds to repurchase stock. The capital structure change is permanent (so debt is perpetual). Fill in all of the missing information in the table below.

    Unlevered Levered
    EBIT 7,500,000 7,500,000
    Taxes (40%)
    Net Income
    #Shares 1,000,000
    Unlevered return 10% 10%
    Return on Equity rS
    Firm Value (V)

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    Solution Preview

    Please refer attached file for better clarity of functions in MS Excel.

    Unlevered Levered
    EBIT $7,500,000 $7,500,000
    INTEREST $0 $480,000
    EBT ...

    Solution Summary

    Solution calculates the missing information and completes the table. Calculations are carried out in MS Excel format.