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An unlevered company with a cost of equity of 12% expects to generate $4 million in...

An unlevered company with a cost of equity of 12% expects to generate $4 million in earnings before interest and taxes (EBIT) each year into perpetuity. The firm pays a tax rate of 31%.

Based on its after-tax earnings and cost of equity, what is the value of the firm?

An unlevered company with a cost of equity of 14% generates $3 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $4 million in debt with a pre-tax cost of 7% to its capital structure and using the proceeds to reduce equity by a like amount as to keep total invested capital unchanged. The firm pays a tax rate of 39%.

Assuming that the company's EBIT stream can be earned into perpetuity and that the debt can be perpetually issued (or rolled), what is the value of the firm?

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