Discrete Discs Inc

question 62

Multiple Choice

Discrete Discs Inc.manufactures hard disk drives for personal computers.Discrete is an all equity firm.At the end of the current year,the CFO expects EBIT to be $10M and the same earnings are expected annually in perpetuity.The company is not growing so CAPEX and investments in net working capital are zero.The cost of equity for Discrete is 8%.Solid State Storage Inc.is identical to Discrete except that it has $3M of long term debt outstanding.What is the value of Solid State's equity? The corporate tax rate is 30%.

• A) $84.5M
• B) $85.4M
• C) $87.5M
• D) $88.4M
• E) $122.9M

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