CashCow Inc.is all equity financed and generates perpetual annual EBIT of $100.Assume that the EBIT,and all other cash flows,occur at year end and that we are currently at the beginning of a year.CashCow has 150 shares outstanding and shareholders require a return of 10%.CashCow hires a new CEO,a Mr.Cowslowski,who spends 10% of EBIT on parties,houses and yachts.Assume that this spending is expected to continue in perpetuity.What price will the shares trade at after Mr.Cowslowski is hired? The tax rate is 40%.

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With the new CEO, EBIT is reduced to EBIT × (1 - 0.10). According to M&M Prop 1 (with taxes), the value of unlevered firm is: V_U = 11ea7fdb_fc68_bf71_a768_7decf2f21837_TB2902_11 V_U = 11ea7fdb_fc68_bf72_a768_15617ca7405d_TB2902_11 = $540 The stock price is: Price = 11ea7fdb_fc68_bf73_a768_83b10fd33dd4_TB2902_11 = 11ea7fdb_fc68_e684_a768_017afec74a3e_TB2902_11 = $3.60