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FinanceQ&A LibraryQ1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.Question

Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return.

Current Proposed

Assets $10,000 $18,000

Debt $0 $8,000

Equity $10,000 $10,000

Debt/Equity ratio 0.00 1.00

Interest rate n/a 7%

Shares outstanding 500 500

Share price $20 $20

(b) If the company adds the proposed amount of debt and EBIT is expected to expand proportionally, fill out the table in (a) after the debt is issued.

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