Suppose RIR Ltd expects an EBIT of $25,600 every year forever. The firm currently has no debt, and its cost equity is 8.5 percent, and the tax rate is 35 percent.
i. If the firm can borrow at 5 percent. What will the value of the firm be if the firm takes on debt equal to 60 percent of its unlevered value?
ii. Using M&M Proposition I, what will the value of the firm be if the firm takes on debt equal to 40 percent of its levered value?