The JuneBug (JB) Corporat

The JuneBug (JB) Corporat

The JuneBug (JB) Corporation has a perpetual EBIT of $450,000. The rm is entirely equity nanced. The beta of the rm’s stock is 1.24. You may assume that the risk free interest rate is 2% and that the market risk premium is 4.5%. The company’s tax rate is 39%.(a) What is the value of this unlevered company?(b) Now suppose that the corporation wants to increase its market value to $5,000,000 by issuing perpetual bonds. Calculate the total market value of bonds that the JB Co. should issue to accomplish this goal.(c) Assume the corporation issues $3,000,000 in perpetual debt (i.e. ignore your answer to part (b)). If the corporation’s marginal tax rate decreases by 10%, what would you expect the new rm value to be?

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