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.