KN&J Expects Its EBIT to Be $147,000 Every Year Forever

Multiple Choice

KN&J expects its EBIT to be $147,000 every year forever. The company currently has no debt but can borrow at 7.6 percent while its cost of equity is 14.6 percent. The tax rate is 21 percent. What will be the value of the company if it borrows $40,000 and uses the loan proceeds to repurchase shares?

A) $654,452
B) $646,667
C) $803,811
D) $606,667
E) $681,588