Discrete Discs Inc.manufactures hard disk drives for personal computers.Discrete is an all equity firm.At the end of the current year,the CFO expects EBIT to be $10M 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 Discrete is 8%.Solid State Storage Inc.is identical to Discrete except that it has $3M of long term debt outstanding.What is the value of Solid State's equity? The corporate tax rate is 30%.
A) $84.5M
B) $85.4M
C) $87.5M
D) $88.4M
E) $122.9M
Correct Answer:
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