The Maxwell company expects its EBIT to be $81,400 every year forever. The firm borrow at 7 percent. The firm currently has no debt, and its cost equity is 14 percent. The tax rate is 35 percent.
What is the value of the firm?
What will the value be if the firm borrows $145,000 and uses the proceeds to repurchase shares?
What is the cost of equity after recapitalization?
What are the implications for the firm’s capital structure decision on the cost of equity?
