Problem:
Letang Corporation expects an EBIT of $22,250 every year forever. The company currently has no debt, and its cost of equity is 16 percent. The company can borrow at 9.5 percent and the corporate tax rate is 35.
Required:
Question 1: What is the current value of the company?
Question 2: What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?
Question 3: What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value?
Question 4: What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?
Note: Provide support for your rationale.