Redmond Diagnostic Laboratory is a no growth company with current and expected future Earnings Before...
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Redmond Diagnostic Laboratory is a no growth company with current and expected future Earnings Before Interest and Taxes of $400,000. Redmond currently uses no debt financing, but is considering adding $1,000,000 of debt financing at a cost of 6.5%. Redmond's current tax rate is 25% and unleveraged companies in the same risk class have a cost of equity of 12%.
a).
What is Redmond Diagnositc Laboratory's current value? (3)
b).
Now assume that Redmond changes its capital structure and adds $1,000,000 debt:
i).
What is Redmond's value using the 1958 Modigliani and Miller model without taxes? (2)
ii).
What is Redmond's value using the 1963 Modigliani and Miller model with corporate taxes? (3)
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