Mowatt Lane Inc. has $4,000,000 in assets, 100% equity and perpetual EBIT of $600,000 a year. The firm has 60,000 shares outstanding at $60 a share. The firm’s cash flows should be discounted at 13% and its tax rate is 25%. It is going to borrow $1,000,000 at a 10% interest rate and use the money to repurchase stock at $60 a share.
What is the firm’s breakeven EBIT? Should it repurchase its shares? Why?
What is Mowatt Lane Inc.’s value after it adds debt to the capital
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