SOLVED: Eastern Markets has no debt outstanding and a total market valueof 154,000. Earnings before interest and taxes, EBIT, areprojected to be12,000 if economic conditions are normal. If thereis strong expansion in the economy, then EBIT will be 27 percenthigher. If there is a recession, then EBIT will be 55 percentlower. The firm is considering a 20,000 debt issue with aninterest rate of 6.5 percent. The proceeds will be used torepurchase shares of stock. There are currently 2,000 sharesoutst

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In year 1, AMC will earn 2000 before interest and taxes. The market expects these earnings to grow at a rate of 3 % per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 40 %. Right now, the firm has 5000 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3 % per year. Suppose the risk-free rate

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