Question

Carter Co. has a value of $80 million. Buleigh is otherwise identical to Carter Co., but has $32 million in debt. Suppose that both firms are growing at a rate of 5%, the corporate tax rate is 38%, the cost of debt is 6%, and Carter's cost of equity is 15% (assume rsU is the appropriate discount rate for the tax shield).

Use the Modigliani and Miller theory extension for growth to complete the following table:

Carter Co. Burleigh Co.

Value of firm Given: $80 million

Select from: $86.10 mill, $86.97 mill, 86.64 mill, or $87.30 mill

Value of Stock Given: $80 million

Select from: $54.64 mill, $54.10 mill, $55.30 mill, or $54.97 mill

Cost of Equity Given 15%

Select from: 20.27%, 20.24%, 20.21%, or 20.32%