Problem:
Cavo Corporation expects an EBIT of $19,750 every year forever. The company currently has no debt, and its cost of equity is 15 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 10%. What will the value of the firm be if the company takes on debt equal to 50% of its unlevered value?
Question 3: Suppose the company can borrow at 10%. What will the value of the firm be if the company takes on debt equal to 100% of its unlevered value?
Question 4: What will the value of the firm be if the company takes on debt equal to 50% of its levered value?
Question 5: What will the value of the firm be if the company takes on debt equal to 100% of its levered value?
Note: Please provide reasons to support your answer.