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Analysts expect the Rumpel Felt Company to generate EBIT of $ 9.6million annually in perpetuity​ (starting...

Analysts expect the Rumpel Felt Company to generate EBIT of $ 9.6million annually in perpetuity​ (starting in one​ year). Rumpel is all equity financed and its stockholders require a return of 4.6%.

The value of Rumpel is $208.7million. If Rumpel borrows $80million​ (interest-only in​ perpetuity) with a cost of debt of 2.1%​,

then what will the equity be​ worth?  Note​:Assume that there are no taxes.

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Answer #1

M&M proposition I (without taxation) claims that capital structure has no impact on value of firm.

Value of unlevered Firm(VU) = Value of levered Firm(VL)

Thus,

putting the values

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