15. M&M and Taxes In Problem 14, what is the cost of equity after recapital- ization? What is the WACC? What are the implications for the firm’s capital struc- ture decision? 16. M&M Tool Manufacturing has an expected EBIT of $73,000 in perpetuity and a tax rate of 35 percent. The firm has $145,000 in outstanding debt at an interest rate of 7.25 percent, and its unlevered cost of capital is 11 percent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt–equity ratio if the goal is to maximize the value of the firm? Explain.
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