Cavo Corporation expects an EBIT of $19,750 every year forever. The company currently has no debt, and its cost of equity is 15 percent. The corporate tax rate is 35 percent.
1. What is the current value of the company?
2. Suppose the company can borrow at 10%. What will the value of the firm be if the company takes on debt equal to 50% of its unlevered value?
3. Suppose the company can borrow at 10%. What will the value of the firm be if the company takes on debt equal to 100% of its unlevered value?
4. What will the value of the firm be if the company takes on debt equal to 50% of its levered value?
5. What will the value of the firm be if the company takes on debt equal to 100% of its levered value?