question archive This question has 4 little questions
This question has 4 little questions
Subject:FinancePrice: Bought3
This question has 4 little questions.
Tim Hortons currently has EBIT of $43,000 and is all equity financed. EBIT are expected to grow at a rate of 1% per year. The firm pays corporate taxes equal to 29% of taxable income. The cost of equity for this firm is 16%.
1. What is the value of the firm when it is equally financed? (answer: $203,533.33)
2. When the firm issues $55,000 of debt paying interest of 8% per year and uses the proceeds to retire equity. The debt is expected to be permanent.
The value of the firm is? (answer: 219483.33)
The value of the equity after the debt issue is? (answer: 164483.33)
3. Suppose that with the $55,000 of debt the firm has a value of $219,483.33 and a value of equity of $164,483.33. What will be the expected rate of return on the equity? (Answer is 17.9)
Please show steps! Excel is fine too please show formulas!
