Problem:
O'Connell & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow at 8 percent. O'Connell currently has no debt, and its cost of equity is 14 percent.
Required:
Question 1: If the tax rate is 35 percent, what is the value of the firm?
Question 2: What will the value be if the company borrows $140,000 and uses the proceeds to repurchase shares?
Note: Explain the solution in detail.