New Schools, Inc

question 39

Multiple Choice

New Schools, Inc. expects an EBIT of $7,000 every year forever. The firm currently has no debt, and its cost of equity is 17 percent. The firm can borrow at 8 percent and the corporate tax rate is 34 percent. What will the value of the firm be if it converts to 50 percent debt?

• A)$29,871.17
• B)$31,796.47
• C)$32,407.16
• D)$34,552.08
• E)$37,119.30

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Definitions:

Comparative Advantage

The ability of a country or individual to produce a particular good or service at a lower opportunity cost than others.

Production Possibilities

The different mixes of products and services that a country can generate considering its accessible resources and current technology.

Total Output

The complete quantity of goods or services produced by a firm, industry, or economy within a specified period.

World-Market Price

The internationally agreed-upon price of a commodity, product, or service, influenced by global supply and demand.