M&M Pies has no debt in its capital structure. Current market price per share is $80 for it’s 195,000 shares. The managers of M&M Pies are considering doing a financial restructuring to add debt to the firm’s capital structure. No changes are planned on the operating side of the firm, so EBIT is expected to remain the same at $2,392,000, with a 100% dividend payout ratio. The firm can issue new debt at a yield of 7%. The corporate tax rate is 25%. Ignore issuing costs. Three alternative capital structures are under consideration:
Case 1 2 3
Debt issued 0 $1,000,000 $2,000,000
What is the firm value under each alternative?