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Ice Cream Sandwich Co expects EBIT of $200,000 every year forever

Finance Oct 20, 2020

Ice Cream Sandwich Co expects EBIT of $200,000 every year forever.Ice Cream Sandwich Co. currently has no debt and its cost of equity is 15%. The firm can borrow at 6%. The corporate tax rate is 32%.
a) What is the value of the firm?
b) Given that the firm has a value of $906,666.67 when it is all equity, what will be the value of the firm if Ice Cream Sandwich Co. borrows $200,000 of permanent debt and uses the proceeds to buy back stock?
c) Given that the firm has a value of $906,666.67 when it is all equity, how can Ice Cream Sandwich Co. maximize the value of the firm? What will be the maximum value if there are no costs to financial distress? 
d) Suppose that with $200,000 of debt, there is a 5% probability of financial distress, in which case the firm will have a present value of $210,000. What is the value of the firm in this case? Recall that the value of the firm with $200,000 debt and no costs to financial distress was $970,666.67.

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