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You own all of the equity in a debt-free app development business that generates cash flows...

You own all of the equity in a debt-free app development business that generates cash flows of $420,000 each year in perpetuity. The cost of assets, kAssets is 10 percent and the tax rate is 25 percent. What is the value of your all-equity firm?

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Value of firm $


If you decide to replace $1 million of equity by borrowing $1 million at an interest rate of 6 percent how much would the value of the firm increase?

Value of firm $


What would the kcs and WACC for your business be before and after the proposed financial restructuring? Use M&M Proposition 2 with taxes, Equation 16.5, to determine the expected return on the equity for input to the WACC calculation. Assume that all cash flows are perpetuities and that the second and third M&M conditions hold. (Round answers to 2 decimal places, e.g. 17.54%.)

kcs %
WACC %
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