Snickers expects EBIT of $21.550 million every year forever. The company currently has no debt, and its cost of equity is 15 percent. The company can borrow at 8.5 percent and the corporate tax rate is 40 percent.
1. What is the current value of Snickers?
2. What will the value of the company be if Snickers takes on debt equal to 40% of it’s unlevered value?
3. What is the cost of equity and weighted--average cost of capital of Snickers with the levered capital structure shown in part 2?