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ABC Company


The beta of the equity of ABC Company is 1.67 and ABC has a debt-to-equity ratio of

0.67 calculated at market values. The debt is risk-free and perpetual. ABC generates

annual EBIT of $100 and has 100 shares of common stock outstanding. The expected

return on the market portfolio is 15% and the risk-free interest rate is 5%. The corporate

tax rate is 30%. Assume that personal taxes and bankruptcy costs are not relevent.


Considering an expansion project that will require an initial investment of

133.33. This expansion project is estimated to increase the firm's annual EBIT by

20%. How do I determine the new value of ABC if it undertakes the investment and

finances it 100% with debt, permanently altering its leverage. Also how can I find the new

value of the equity and the new share price?

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