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Problem:

Assume your firm is zero-growth and pays all its net income in dividends each year Also assume your firm can borrow money when it needs to at an interest rate of 6%. Currently your firm's cost of equity (Rs) is 10%, but if any money is borrowed that cost will rise to 11%.

Sales this year are expected to be $500,000 and operating costs are expected to be $400,000. Your firm's effective tax rate is 40%.

Required:

Question 1: Given these conditions, what is the current value of your firm?

Question 2: What will be the new value of your firm if it takes on $250,000 in debt?

Please provide a step by step solution.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M91147153

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