Problem:
Cavo Corporation expects an EBIT of $38,000 every year forever. The company currently has no debt, and its cost of equity is 13 percent. The corporate tax rate is 35 percent
Required:
Question 1: What is the current value of the company?
Question 2: Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value?
Question 3: Suppose the company can borrow at 9 percent. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value?
Question 4: What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value?
Question 5: What will the value of the firm be if the company takes on debt equal to 100 percent of its levered value?
Note: Please explain comprehensively and give step by step solution.