A company currently has EBIT of $25,000 and is all-equity financed. The company expect EBIT to stay at this level indefinitely. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm? Make a case for why X is the best option and explain what considered, what assumptions you made and why?

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter21: Dynamic Capital Structures And Corporate Valuation
Section: Chapter Questions
Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....
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A company currently has EBIT of $25,000 and is all-equity financed. The company expect EBIT to stay at this level indefinitely. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm? Make a case for why X is the best option and explain what considered, what assumptions you made and why? 

 
 
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