Sun plc expects its EBIT to be £200,000 every year forever

Subject:FinancePrice:2.86 Bought25

Share With

Sun plc expects its EBIT to be £200,000 every year forever. It currently has no debt but can borrow at a rate of 10 per cent. The firm’s WACC is currently 15 per cent and the tax rate is 25 per cent.

1. What is the value of the firm and its cost of equity?                                          (3 Marks)
2. What would be the value of the firm and its cost of equity if it borrows 300,000 and uses the proceeds to repurchase shares?                                                               (4 Marks)
3. Comment on the values you have calculated in parts (a) and (b).                     (3 Marks)