Scooby Snacks Inc is an all equity firm. At the end of the current yea

Scooby Snacks Inc is an all equity firm. At the end of the current year, the CFO expects EBIT to be $5M and the same earnings are expected annually in perpetuity. The company is not growing so CAPEX and investments in net working capital are zero.

The cost of equity for Scooby Snacks Inc is 14%. Scooby’s prime competitor is a company called Shaggy Treats Inc Shaggy Treats is identical to Scooby Snacks in every respect except that Shaggy Treats has $2.5M of long term debt outstanding. What is the value of Shaggy Treats’ equity? The corporate tax rate is 30%.
A) $22.5M
B) $23.0M
C) $23.25M
D) $25M
E) $25.75M

ANSWER

C