Scooby Snacks Inc.is an all equity firm.At the end of the current year,the CFO expects EBIT to be $5M 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 Scooby Snacks Inc.is 14%.Scooby's prime competitor is a company called Shaggy Treats Inc.Shaggy Treats is identical to Scooby Snacks in every respect except that Shaggy Treats has $2.5M of long term debt outstanding.What is the value of Shaggy Treats' equity? The corporate tax rate is 30%.

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Quizplus · Accepted Answer

This solution uses Modigliani & Miller Proposition I with taxes. V_U = 11ea7fdb_fc64_7a73_a768_f7c993aa00ee_TB2902_11 V_U = 11ea7fdb_fc64_7a74_a768_4317d199148a_TB2902_11 = $25M V_L = V_U + T × D V_L = $25M + 0.30 × $2.5M = $25.75M E = V_L - D E = $25.75M - $2.5M = $23.25M