Theresa’s belongs to Harvester, which has expected earnings before interest and tax (EBIT) of £45,000 in perpetuity and a tax rate of 30%. Harvester has £60,000 in outstanding debt at an interest rate of 8%. The unlevered cost of capital is 12%.
1. What is the value of Harvester according to MM Proposition I with taxes?
2. Should Harvester change its debt-equity ratio if the goal is to maximize the value of the firm?
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